<PAGE> 1
As filed pursuant to 424(b)(1)
under the Securities Act of 1933
Registration No. 33-60539
PROSPECTUS
$100,000,000
LOGO
AMERICAN RICE, INC.
13% MORTGAGE NOTES DUE 2002
WITH CONTINGENT INTEREST
---------------------------
The 13% Mortgage Notes due 2002 (the "Mortgage Notes") are being offered
(the "Offering") by American Rice, Inc. ("ARI" or the "Company"). The Mortgage
Notes are being offered at a discount from the aggregate principal amount of the
Mortgage Notes so as to provide gross proceeds to the Company of $94.0 million.
Fixed Interest (as defined) will accrue on the Mortgage Notes at the rate of
13% per annum and will be payable semiannually in cash in arrears on February 28
and August 31 of each year (each, an "Interest Payment Date"), commencing
February 28, 1996. Contingent Interest (as defined) is payable on the Mortgage
Notes, on each such Interest Payment Date, in an aggregate amount equal to 4% of
the Company's Consolidated Cash Flow (as defined) for the six-month period
ending on June 30 or December 31 (each, a "Semiannual Period") immediately
preceding the Semiannual Period most recently completed prior to such Interest
Payment Date, up to a limit of the Contingent Interest on $40.0 million of the
Company's Consolidated Cash Flow during the fiscal year in which such interest
is accrued; provided that Contingent Interest shall be deemed not to accrue
during any Semiannual Period at the end of which the Company's Consolidated Cash
Flow (as defined) during such Semiannual Period and the immediately preceding
Semiannual Period is less than $20.0 million. The aggregate amount of Contingent
Interest payable in any Semiannual Period will be reduced pro rata for
reductions in the outstanding principal amount of Mortgage Notes occurring prior
to the close of business on the record date immediately preceding such payment
of Contingent Interest. The Company, at its option, may defer payment of all or
a portion of any installment of Contingent Interest then otherwise due if, and
only to the extent that, (a) the payment of such portion of Contingent Interest
will cause the Company's Adjusted Fixed Charge Coverage Ratio (as defined) for
the two consecutive Semiannual Periods immediately preceding the Semiannual
Period last completed prior to such Interest Payment Date to be less than 2.0:1
on a pro forma basis after giving effect to the assumed payment of such
Contingent Interest and (b) the principal of the Mortgage Notes corresponding to
such Contingent Interest has not then matured and become due and payable (at
stated maturity, upon acceleration, upon maturity of repurchase obligation or
otherwise). The payment of Contingent Interest is subject to the restrictions
described herein.
The Mortgage Notes will mature on July 31, 2002. The Company will not be
required to make any mandatory redemption or sinking fund payments with respect
to the Mortgage Notes prior to maturity. However, in the event of a Change of
Control (as defined), holders of the Mortgage Notes will have the right to
require the Company to repurchase their Mortgage Notes, in whole or in part, at
a price equal to the lesser of 101% or the optional redemption price then
applicable of the Accreted Value (as defined) of the Mortgage Notes, plus
accrued and unpaid interest to the date of repurchase. A Change of Control also
may constitute a default under the Company's Revolving Credit Loan (as defined),
and as a result, the Company may not have the financial resources to repay all
of its Indebtedness obligations upon the occurrence of a Change of Control. In
addition, the Company may be obligated to offer to repurchase Mortgage Notes on
a pro rata basis at 100% of their Accreted Value, plus accrued interest to the
date of repurchase, with the Net Cash Proceeds of certain sales or other
dispositions of assets, including the sale of the Houston Property (as defined)
or the proceeds from remarketing the Company's Freeport IRBs (as defined).
The Mortgage Notes will not be redeemable prior to July 31, 1999, except
that prior to August 31, 1998, the Company may redeem at its option up to
one-third of the initial aggregate principal amount of the Mortgage Notes at the
redemption price set forth herein, plus accrued and unpaid interest to the date
of redemption, with the net proceeds received by the Company from a public
offering of common stock of the Company, provided that at least two-thirds of
the initial aggregate principal amount of the Mortgage Notes remain outstanding
immediately after the occurrence of such redemption. On or after July 31, 1999,
the Mortgage Notes will be redeemable at the option of the Company, in whole or
in part, at the redemption prices set forth herein, plus accrued and unpaid
interest to the date of redemption.
The Mortgage Notes will be senior secured obligations of the Company and
will rank pari passu in right of payment with all existing and future senior
Indebtedness (as defined), including borrowings under the Company's Revolving
Credit Loan (as defined) and senior in right of payment to all future
subordinated Indebtedness of the Company. The Mortgage Notes will be secured by,
among other things: (i) a deed of trust creating a second priority security
interest in the Company's leasehold interests in rice processing facilities
located in Freeport, Texas that is junior in priority only to $13.3 million in
aggregate principal amount of the Freeport IRBs, which currently are held by the
Company and will be pledged to the holders of the Mortgage Notes until such time
as the Company remarkets the Freeport IRBs; (ii) a deed of trust creating a
first priority security interest in the Company's fee and leasehold interests in
rice processing facilities located in Maxwell, California; (iii) a mortgage
creating a first priority security interest in the Company's fee interest in
rice processing facilities located in Stuttgart, Arkansas; (iv) a deed of trust
creating a first priority security interest in the Company's fee interest in the
Houston Property; (v) first priority pledges of the Company's capital stock held
by the Company's parent (other than certain shares of preferred stock previously
pledged), the capital stock of the Company's subsidiaries held by the Company,
the ERLY Intercompany Notes (as defined) and the Subsidiary Intercompany Notes
(as defined); and (vi) a pledge of the Company's registered trademarks. At June
30, 1995, on a pro forma basis after giving effect to the Offering and the
application of the net proceeds therefrom as described under "Use of Proceeds,"
the Company would have had approximately $0.2 million of outstanding senior
Indebtedness other than the Mortgage Notes. The Indenture pursuant to which the
Mortgage Notes will be issued will limit the ability of the Company and its
subsidiaries to incur certain additional Indebtedness.
---------------------------
SEE "RISK FACTORS" ON PAGE 8 FOR A DISCUSSION OF CERTAIN
MATTERS THAT SHOULD BE CONSIDERED BY POTENTIAL INVESTORS.
---------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(3)
--------- ------------ -----------
<S> <C> <C> <C>
Per Mortgage Note..................... 94.0% 4.0% 90.0%
Total................................. $94,000,000 $4,000,000 $90,000,000
</TABLE>
------------------
(1) Plus accrued interest and accretion, if any, from August 24, 1995 (the
"Closing Date").
(2) The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses and other fees payable by the Company estimated at
$2,000,000.
---------------------------
The Mortgage Notes are offered by the Underwriter subject to prior sale,
when, as and if issued to and accepted by the Underwriter and subject to
approval of certain legal matters by counsel for the Underwriter. It is expected
that delivery of the Mortgage Notes will be made against payment therefor on or
about August 24, 1995, in New York, New York.
---------------------------
JEFFERIES & COMPANY, INC.
August 21, 1995
<PAGE> 2
[INSERT COLORWORK HERE]
<PAGE> 3
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------------------------
ADDITIONAL INFORMATION
This Prospectus is part of a Registration Statement on Form S-1 (together
with all amendments and exhibits thereto, the "Registration Statement") which
the Company has filed with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Securities
Act"), relating to the securities offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is made to the Registration
Statement. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to herein are by necessity
summaries, but all material terms are summarized herein. With respect to each
such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference.
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy and information statements and other
information with the Commission. Such reports, proxy and information statements
and other information as well as the Registration Statement and Exhibits of
which this Prospectus is a part may be inspected and copied at the public
reference facilities of the Commission, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, as well as at the Commission's regional
offices: 7 World Trade Center, 13th Floor, New York, New York 10048 and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can
be obtained from the Commission by mail at prescribed rates. Requests should be
directed to the Commission's Public Reference Section, Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The Company's Common
Stock, $1.00 par value per share (the "Common Stock") is listed on the Nasdaq
Small Capitalization Market. Material filed by the Company can be inspected at
the offices of the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington, D.C. 20006-1500.
FOR CALIFORNIA RESIDENTS: WITH RESPECT TO SALES OF THE SECURITIES BEING
OFFERED HEREBY TO CALIFORNIA RESIDENTS AS OF THE DATE OF THIS PROSPECTUS, SUCH
SECURITIES MAY BE SOLD ONLY TO (1) "ACCREDITED INVESTORS" WITHIN THE MEANING OF
REGULATION D UNDER THE SECURITIES ACT, (2) BANKS, SAVINGS AND LOAN ASSOCIATIONS,
TRUST COMPANIES, INSURANCE COMPANIES, INVESTMENT COMPANIES REGISTERED UNDER THE
INVESTMENT COMPANY ACT OF 1940, PENSION OR PROFIT-SHARING TRUSTS, CORPORATIONS
OR OTHER ENTITIES WHICH, TOGETHER WITH THE CORPORATION'S OR OTHER ENTITY'S
AFFILIATES WHICH ARE UNDER COMMON CONTROL, HAVE A NET WORTH ON A CONSOLIDATED
BASIS ACCORDING TO THEIR MOST RECENT REGULARLY PREPARED FINANCIAL STATEMENTS
(WHICH SHALL HAVE BEEN REVIEWED BUT NOT NECESSARILY AUDITED BY OUTSIDE
ACCOUNTANTS) OF NOT LESS THAN $14 MILLION, AND SUBSIDIARIES OF THE FOREGOING OR
(3) ANY PERSON (OTHER THAN A PERSON FORMED FOR THE SOLE PURPOSE OF PURCHASING
THE SECURITY BEING OFFERED HEREBY) WHO PURCHASES AT LEAST $1,000,000 AGGREGATE
AMOUNT OF THE SECURITIES OFFERED HEREBY. EACH CALIFORNIA RESIDENT PURCHASING THE
SECURITIES OFFERED HEREBY WILL BE DEEMED TO REPRESENT BY SUCH PURCHASE THAT IT
COMES WITHIN ONE OF THE AFOREMENTIONED CATEGORIES AND THAT IT WILL NOT SELL OR
OTHERWISE TRANSFER SUCH SECURITIES TO A CALIFORNIA RESIDENT UNLESS THE
TRANSFEREE COMES WITHIN ONE OF THE AFOREMENTIONED CATEGORIES AND THAT IT WILL
ADVISE THE TRANSFEREE OF THIS CONDITION WHICH TRANSFEREE, BY BECOMING SUCH, WILL
BE DEEMED TO BE BOUND BY THE SAME RESTRICTIONS ON RESALE.
i
<PAGE> 4
[THIS PAGE INTENTIONALLY LEFT BLANK]
ii
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements of
the Company, including the notes thereto, appearing elsewhere in this
Prospectus. Unless otherwise indicated, references in this Prospectus to a
fiscal year shall mean the fiscal year ending March 31 of such year and
references to a crop year shall mean the twelve-month period beginning August 1
of such year. References to "ERLY" shall mean ERLY Industries Inc., ARI's parent
company; references to "Pre-Acquisition ARI" shall mean American Rice, Inc.
prior to the Acquisition (as defined); and references to "Comet" shall mean
Comet Rice, Inc., unless otherwise indicated.
THE COMPANY
The Company is the largest U.S.-based and one of the world's leading
processors and marketers of branded rice products, with leading brand positions
in many U.S. markets as well as Saudi Arabia, Haiti, Puerto Rico and certain
other rice consuming markets. The Company annually markets approximately 15% of
the total U.S. rice crop and is the only marketer of rice in the world with
significant sources of rough rice and milling facilities in the two major rice
producing regions of the United States as well as certain strategic locations
overseas. This allows ARI to moderate the impact of regional trade imbalances
caused by climate and geopolitical factors on operating performance. The Company
is able to maximize its margins by purchasing rice grown domestically and abroad
to take advantage of regional cost and supply availabilities. The Company
generated net sales of $373.1 million and earnings before management fees,
interest, taxes, depreciation and amortization ("EBITDA") of $22.8 million in
fiscal 1995.
Approximately 70% of the Company's net sales over the last two fiscal years
has been attributable to sales of branded rice, which typically commands a
higher price and profit margin than commodity rice and is less susceptible to
decreases in sales volume due to increases in consumer prices. With leading
brand names that sustain the number one or number two positions in many of the
major domestic rice markets, ARI typically is able to achieve high margins in
these branded markets. ARI markets white rice, instant rice, parboiled rice,
brown rice and rice mixes under proprietary, trademarked brand names such as
Blue Ribbon(R), Comet(R), Adolphus(R), AA(R), Cinta Azul(R), Wonder(R), Colusa
Rose(R) and Chopstick(R). ARI is a leading marketer of U.S. rice in many of the
world's major rice importing countries, including Saudi Arabia, Haiti and
Turkey. In Saudi Arabia, the third largest import rice market in the world, the
Chopstick(R) brand, known locally as Abu Bint(R), has been the number one brand
of U.S. grown rice sold in that country since 1979 and has consistently
represented over two-thirds of the U.S. grown rice sold in that country. ARI's
leading brand names and broad product lines have facilitated the Company's
penetration into new markets and introduction of new products in existing
markets.
Rice is the primary staple food in many countries and is the cereal grain
with the highest level of human consumption in the world, comprising
approximately 40% of world cereal grain consumption. Primarily as a result of
population increases, world rice consumption has increased approximately 125%
during the last 30 years to approximately 350 million metric tons in 1994.
Domestic consumption of rice has more than doubled since 1984 and currently
exceeds 3.3 million metric tons annually. The increase in U.S. rice consumption
is primarily due to the substantial population growth of certain ethnic groups
in the United States and, to a lesser degree, increased awareness by the general
population of the impact of diet on health.
On May 26, 1993, the Company and Comet, a wholly owned subsidiary of ERLY,
were combined by transferring all of the operating assets and liabilities of
Comet to ARI in exchange for additional shares of ARI capital stock (the
"Acquisition"). As a result of the Acquisition, the Company diversified the
market for its products, expanded its share of both the domestic and export rice
markets, increased its sources of supply of rough rice and reduced its operating
costs. The Acquisition reduced manufacturing and distribution costs, increased
gross margins and allowed ARI to process and package products closer to the
ultimate customer, thereby utilizing its total production capacity more
efficiently. Management believes that significant cost savings and operating
synergies directly resulted from the Acquisition and it increased the diversity
of its raw product sources and expanded the number of its markets, thus reducing
the Company's exposure to the uncertainties of a regional rice crop or the loss
of a single market.
1
<PAGE> 6
The Company's business strategy is to increase net sales and cash flow by
implementing the following:
BUILD UPON BRAND LEADERSHIP. Strengthen existing and build new premium,
high margin brands on a worldwide basis and utilize Company-owned or controlled
processing, distribution and marketing systems to ensure superior product
quality and customer service.
CONTINUE EXPANSION INTO NEW MARKETS. Continue to expand and diversify its
customer base and enter new domestic and international markets with its branded
products.
INCREASE DIVERSITY OF SOURCES. Continue to diversify sources of supply as
new opportunities arise to obtain the greatest variety of products on a cost
competitive basis.
IMPROVE SIZE AND SCALE EFFICIENCY. Capitalize on new industry technologies
as they develop and expand ARI's use of innovative bulk handling procedures to
realize increased margins from lower cost operations.
Consistent with its business strategy, ARI recently entered into a joint
venture ("ARI-Vinafood") with a company owned by the Socialist Republic of
Vietnam to process and market Vietnamese grown rice. ARI's 55% ownership in
ARI-Vinafood enables it to participate in the world market for Asian origin
rice, the largest market segment in the world rice market. Management believes
that this new product source will enable it to increase its market share in
certain key regions as well as provide a competitive product under its existing
brand names to major rice consuming markets in Asia and South America.
The Company believes that the depth, experience and ability of its
management team represents a significant competitive advantage. The Company's
executive officers average over 17 years of industry experience and are led by
Douglas A. Murphy, President and Chief Executive Officer, who has been with the
Company since 1982.
ERLY holds 81% of the voting power of the Company as a result of the
Acquisition. The common stock of ERLY is directly and indirectly owned of record
and beneficially in the aggregate percentage of 47.2% by Gerald D. Murphy,
Douglas A. Murphy and William H. Burgess, each of whom are directors of ARI and,
in the case of Gerald D. Murphy and Douglas A. Murphy, officers of ARI. On the
Closing Date the Company will make a loan to ERLY in the principal amount of
$10.5 million. ERLY will use substantially all of the loan proceeds to pay a
debt of its subsidiary that has discontinued operations, which ERLY guaranteed.
Partial consideration for the loan to ERLY by ARI is the pledge by ERLY of the
ARI capital stock owned by ERLY. See "Use of Proceeds," "Management," "Security
Ownership of Certain Beneficial Owners and Management" and "Certain
Relationships and Related Transactions -- Transactions with Affiliates."
The Mortgage Notes will be secured by, among other things, the Company's
fee and leasehold interests in its rice processing facilities located in
Freeport, Texas and Maxwell, California and the Company's registered U.S.
trademarks. The Company has obtained appraisals, dated as of May 31, 1995 and
June 1, 1995, respectively, from American Appraisal Associates, Inc. and Jack K.
Mann, Inc. of its rice processing facilities in Freeport, Texas and Maxwell,
California, respectively. The Freeport, Texas facility and the Maxwell,
California facility were appraised, together with the Company's registered U.S.
trademarks used by each facility, on a going concern basis, at approximately
$91.0 million and $45.0 million, respectively.
The Company's Board of Directors has adopted a resolution authorizing
management to sell 39 acres of land in Houston, Texas (the "Houston Property").
Management believes that the net realizable value of the Houston Property
exceeds its current carrying value of approximately $18.3 million. The Houston
Property constitutes a portion of the Collateral (as defined).
2
<PAGE> 7
THE OFFERING
Securities Offered......$100.0 million aggregate principal amount of 13%
Mortgage Notes due 2002. The Mortgage Notes are being
offered at a discount from the aggregate principal
amount of the Mortgage Notes so as to provide gross
proceeds to the Company of $94.0 million.
Maturity................July 31, 2002.
Interest Payment
Dates...................February 28 and August 31, commencing February 28, 1996.
Fixed Interest..........Fixed Interest will accrue at the rate of 13% per annum
and will be payable pro rata to the holders of the
Mortgage Notes on each Interest Payment Date in cash in
arrears.
Contingent Interest.....Contingent Interest is payable pro rata to the holders
of the Mortgage Notes, on each Interest Payment Date, in
an amount equal to 4% of the Company's Consolidated Cash
Flow for the Semiannual Period immediately preceding the
Semiannual Period most recently completed prior to such
Interest Payment Date, up to a limit of the Contingent
Interest on $40.0 million of the Company's Consolidated
Cash Flow during the fiscal year in which such interest
is accrued; provided that Contingent Interest shall be
deemed not to accrue during any Semiannual Period at the
end of which the Company's Consolidated Cash Flow during
such Semiannual Period and the immediately preceding
Semiannual Period is less than $20.0 million. Payment of
all or a portion of any installment of Contingent
Interest may be deferred if (a) the payment of such
portion of Contingent Interest will cause the Company's
Adjusted Fixed Charge Coverage Ratio for the two
consecutive Semiannual Periods immediately preceding the
Semiannual Period last completed prior to such Interest
Payment Date to be less than 2.0:1 on a pro forma basis
after giving effect to the assumed payment of such
Contingent Interest and (b) the principal of the
Mortgage Notes corresponding to such Contingent Interest
has not then matured and become due and payable (whether
at stated maturity, upon acceleration, upon maturity of
repurchase obligation or otherwise). The aggregate
amount of Contingent Interest payable in any Semiannual
Period will be reduced pro rata for reductions in the
outstanding principal amount of Mortgage Notes prior to
the close of business on the record date immediately
preceding such payment of Contingent Interest. The
payment of Contingent Interest is subject to the
restrictions set forth herein. See "Description of
Mortgage Notes -- Principal, Maturity and Interest."
Security................The Mortgage Notes will be secured by the Collateral,
which includes: (i) the Freeport Deed of Trust (as
defined) creating a second priority security interest in
the Company's leasehold interests in rice processing
facilities located in Freeport, Texas (the "Freeport
Facility") that is junior in priority only to $13.3
million in aggregate principal amount of the Company's
Freeport IRBs, which currently are held by the Company
and will be pledged to the holders of the Mortgage Notes
until such time as the Company remarkets the Freeport
IRBs in accordance with the terms of the indenture
pursuant to which the Mortgage Notes will be issued (the
"Indenture"); (ii) the Maxwell Deed of Trust (as
defined) creating a first priority security interest in
the Company's fee and leasehold interests in rice
processing facilities located in Maxwell, California
(the "Maxwell Facility"); (iii) the Stuttgart Mortgage
(as defined) creating a first priority security interest
in the Company's fee interest in rice processing
facilities located in Stuttgart, Arkansas (the
"Stuttgart Facility"); (iv) the Houston Deed of Trust
(as defined) creating a first priority security interest
in
3
<PAGE> 8
the Company's fee interest in the Houston Property; (v)
pledge agreements creating first priority security
interests in the capital stock of the Company held by
ERLY (other than 200,000 shares of the Company's Series
B Preferred Stock (as defined) pledged to the holders of
the Company's Series C Preferred Stock (as defined)),
the capital stock of the Company's subsidiaries held by
the Company, the ERLY Intercompany Notes and the
Subsidiary Intercompany Notes; (vi) a security agreement
creating a first priority security interest in all
registered U.S. trademarks, and a security interest in
all other registered trademarks, owned or licensed by
the Company; and (vii) a pledge of all proceeds of the
foregoing (including insurance). See "Description of
Mortgage Notes -- Security." In the case of the
leasehold interests of the Company in the Freeport
Facility and the Maxwell Facility, the leases for such
facilities, as clarified by landlord estoppel agreements
to be entered into on or before the Closing Date, will
permit a mortgage lien in favor of the Trustee to be
placed on such leasehold interests and permit the
assignment of such leasehold interests by the Trustee
following an Event of Default (as defined). See
"Description of Mortgage Notes -- Security." The
Indenture will prohibit the Company from creating
additional liens on the Collateral, except for Permitted
Liens (as defined), which include certain liens securing
Indebtedness under the Revolving Credit Loan that are
junior in priority to the liens on the Collateral in
favor of the Trustee, certain liens renewed or extended
in connection with Permitted Refinancing Indebtedness
(as defined), liens securing performance of certain
statutory obligations arising in the ordinary course of
business, liens created by minor real property
encumbrances that do not interfere in any material
respect with the ordinary course of business of the
Company and its subsidiaries, liens on the Freeport
Facility securing the Freeport IRBs to the extent
necessary for the Company to remarket the Freeport IRBs,
and certain liens incurred in the ordinary course of
business of the Company or any of its subsidiaries in an
amount not to exceed $2.5 million at any time
outstanding. See "Description of Mortgage
Notes -- Certain Covenants -- Liens."
Mandatory Redemption....None.
Optional Redemption.....The Mortgage Notes will not be redeemable prior to July
31, 1999, except that prior to August 31, 1998, the
Company may redeem at its option up to one-third of the
initial aggregate principal amount of the Mortgage Notes
at the redemption price set forth herein, plus accrued
and unpaid interest to the date of redemption, with the
net proceeds received by the Company from a public
offering of common stock of the Company, provided that
at least two-thirds of the initial aggregate principal
amount of the Mortgage Notes remain outstanding
immediately after the occurrence of such redemption. On
or after July 31, 1999, the Mortgage Notes will be
redeemable at the option of the Company, in whole or in
part, at the redemption prices set forth herein, plus
accrued and unpaid interest to the date of redemption.
Change of Control.......In the event of a Change of Control, the holders of the
Mortgage Notes will have the right to require the
Company to repurchase their Mortgage Notes at a price
equal to the lesser of 101% or the optional redemption
price then applicable of the Accreted Value of the
Mortgage Notes, plus accrued and unpaid interest to the
date of repurchase. Due to the highly leveraged nature
of the Company, the Company may not have sufficient
funds or financing to repurchase the Mortgage Notes and
satisfy the Company's obligations under the Revolving
Credit Loan up to a maximum borrowing of $47.5 million,
which may become due upon a Change of Control. See
"Description of
4
<PAGE> 9
Mortgage Notes -- Repurchase at the Option of Holders --
Change of Control."
Ranking.................The Mortgage Notes will be senior secured obligations of
the Company and will rank pari passu in right of payment
with all existing and future senior Indebtedness,
including borrowings made under the Revolving Credit
Loan and senior in right of payment to all future
subordinated Indebtedness of the Company. The Collateral
(other than capital stock) is subject to liens in favor
of the lender under the Revolving Credit Loan that will
be subordinate to the liens in such Collateral granted
to the Trustee (as defined) under the Indenture. In
addition, any claim by the Company or the Trustee
against the assets of the Company's subsidiaries to
satisfy the Company's obligations under the Mortgage
Notes would be subordinate in right of payment to the
amount of Indebtedness of such subsidiaries in excess of
the amount of sums advanced to them by the Company and
represented by Subsidiary Intercompany Notes (as
defined). At June 30, 1995, on a pro forma basis after
giving effect to the Offering and the application of the
net proceeds therefrom as described under "Use of
Proceeds," the Company would have had approximately $0.2
million of outstanding senior Indebtedness other than
the Mortgage Notes and the Company's subsidiaries in the
aggregate would have had approximately $5.4 million in
Indebtedness attributable to trade accounts payable,
secured inventory financings, secured purchase money
loans, financing lease obligations and unsecured
borrowings.
Covenants...............The Indenture will contain certain covenants that, among
other things, limit the ability of the Company and its
subsidiaries to incur additional Indebtedness and issue
preferred stock, pay dividends or make other
distributions, repurchase Equity Interests (as defined)
or subordinated Indebtedness, make Restricted
Investments (as defined), create certain liens, enter
into certain transactions with affiliates, sell assets
of the Company or its subsidiaries, issue or sell Equity
Interests of the Company's subsidiaries or enter into
certain mergers and consolidations. In addition, under
certain circumstances, the Company will be required to
offer to repurchase the Mortgage Notes at a price equal
to 100% of their Accreted Value, plus accrued and unpaid
interest to the date of repurchase, with the net
proceeds of certain Asset Sales (as defined), including
the sale of the Houston Property, or the proceeds from
remarketing the Freeport IRBs. Also, the Company will be
required to pay Liquidated Damages (as defined) pro rata
to the holders of the Mortgage Notes if the Company
fails to sell the Houston Property within 18 months of
the Closing Date, which obligation to pay Liquidated
Damages will continue until such property is sold. See
"Description of Mortgage Notes -- Certain Covenants."
Original Issue
Discount................The Mortgage Notes will be issued with original issue
discount requiring holders of the Mortgage Notes to
include amounts in gross income for U.S. federal income
tax purposes prior to receipt of the cash to which the
income is attributable. See "Material Federal Income Tax
Consequences."
Use of Proceeds.........The proceeds from the Offering will be used to repay
certain indebtedness, to make an intercompany loan to
ERLY and for working capital and general corporate
purposes. See "Use of Proceeds."
5
<PAGE> 10
SUMMARY CONSOLIDATED FINANCIAL DATA
The following tables set forth summary consolidated financial data of the
Company for the years ended March 31, 1993 to 1995, for the three-month periods
ended June 30, 1994 and 1995, and for Pre-Acquisition ARI for the year ended
March 31, 1993 and the period from April 1, 1993 to May 26, 1993. The summary
consolidated financial data are derived from the audited financial statements of
the Company and of Pre-Acquisition ARI, except for the period from April 1, 1993
to May 26, 1993 and the three-month periods ended June 30, 1994 and 1995, which
are unaudited. The unaudited financial statements include all adjustments which
are, in the opinion of management, necessary for a fair presentation of the
results of operations for the period, all of which are of a normal, recurring
nature. Because the Acquisition was accounted for as a purchase by Comet of
Pre-Acquisition ARI, the Company's consolidated financial data prior to the
Acquisition reflects the operations of Comet rather than Pre-Acquisition ARI.
The Company's audited financial statements for the year ended March 31, 1993 and
the period from April 1, 1993 to May 26, 1993, included in the audited financial
statements for the year ended March 31, 1994, represent the results of the
Company, including the Company's share of Pre-Acquisition ARI results, using the
equity method due to the Company's 48% interest in Pre-Acquisition ARI prior to
the Acquisition. For all periods after May 26, 1993, the Company's Consolidated
Financial Statements include the results of Pre-Acquisition ARI and Comet. The
pro forma credit statistics and pro forma balance sheet data below give effect
to the Offering as if it had been completed on April 1, 1994 and March 31, 1995,
respectively. The information in the tables should be read in conjunction with
"Selected Consolidated Financial Data," "Pro Forma Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements and the notes
thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
COMET(1) ARI(1)
-------- ---------------------------------------------------
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
------------------------------------ -----------------------
1993(2) 1994 1995 1994 1995
-------- -------- ---------- -------- ----------
(IN THOUSANDS, EXCEPT RATIOS, PER SHARE AND PER HUNDREDWEIGHT
DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales..................................... $169,617 $284,464 $ 373,050 $105,706 $ 86,392
Gross profit.................................. 8,363 36,418 40,814 11,323 9,537
Selling, general and administrative
expenses.................................... 10,779 21,497 23,235 5,272 5,771
Earnings (loss) before extraordinary items.... (11,265) 3,465 3,913 2,010 376
Primary earnings (loss) per share before
extraordinary items(3)...................... -- $ (0.45) $ (0.83) $ 0.16 $ (0.45)
OTHER FINANCIAL DATA:
EBITDA(4)..................................... $ 1,497 $ 19,839 $ 22,751 $ 7,326 $ 5,031
EBIT.......................................... (316) 16,017 18,501 6,281 3,998
Gross profit margin........................... 4.9% 12.8% 10.9% 10.7% 11.0%
Depreciation and amortization(5).............. $ 1,813 $ 3,822 $ 4,250 $ 1,045 $ 1,033
Capital expenditures.......................... 2,651 2,844 3,562 1,625 1,422
Hundredweight of rice sold(6)................. 12,918 17,114 22,304 6,155 5,098
Net sales per hundredweight................... $ 13.13 $ 16.62 $ 16.73 $ 17.17 $ 16.94
Ratio of earnings to fixed charges(7)......... -- 1.5x 1.4x -- 1.1x
PRO FORMA CREDIT STATISTICS:
EBITDA to pro forma cash interest expense, net(8).................... 1.7x -- --
Pro forma total debt to EBITDA....................................... 4.5 -- --
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1995 JUNE 30,
----------------------- 1995
PRO ----------
HISTORICAL FORMA HISTORICAL
---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................ $ 1,864 $ 0 $ 2,742
Current assets....................................................... 89,736 87,872 75,449
Total assets......................................................... 177,500 190,753 163,705
Total debt(9)........................................................ 89,237 103,873 84,300
Total stockholders' equity........................................... 44,212 43,327 44,588
</TABLE>
6
<PAGE> 11
<TABLE>
<CAPTION>
PRE-ACQUISITION ARI(1)
----------------------------
PERIOD FROM
YEAR ENDED APRIL 1, 1993
MARCH 31, TO MAY 26,
1993 1993(1)
---------- -------------
(IN THOUSANDS, EXCEPT
RATIOS, PER SHARE AND PER
HUNDREDWEIGHT DATA)
<S> <C> <C>
OPERATING DATA:
Net sales.......................................................... $176,619 $ 27,025
Gross profit....................................................... 24,580 4,243
Selling, general and administrative expenses....................... 14,163 2,380
Earnings (loss) before extraordinary items......................... 3,250 888
Primary earnings (loss) per share before extraordinary items....... $ 0.20 $ 0.06
OTHER FINANCIAL DATA:
EBITDA(4).......................................................... $ 13,606 $ 2,356
EBIT............................................................... 10,536 1,863
Gross profit margin................................................ 13.9% 15.7%
Depreciation and amortization(5)................................... $ 3,070 $ 493
Capital expenditures............................................... 762 31
Hundredweight of rice sold(6)...................................... 12,645 1,361
Net sales per hundredweight........................................ $ 13.97 $ 19.86
Ratio of earnings to fixed charges(7).............................. 1.4x 1.9x
</TABLE>
---------------
(1) On May 26, 1993, the Company consummated the Acquisition which was accounted
for as a purchase of ARI by Comet. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note 1 to the
Company's Consolidated Financial Statements.
(2) For a discussion of the various factors affecting operating results during
the period indicated, such as the impact of the U.S. trade embargo of Iraq,
see "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Results of Operations."
(3) Represents primary earnings (loss) per share before extraordinary items
applicable to common stock after preferred stock dividend requirements.
Earnings per share are not presented for the year ended March 31, 1993
because the data presented is that of Comet, which was a wholly owned
subsidiary of ERLY.
(4) EBITDA represents operating income before management fees, depreciation and
amortization. The Company has included EBITDA data (which are not a measure
of financial performance under generally accepted accounting principles)
because it understands such data are used by certain investors to determine
the Company's historical ability to service its indebtedness. EBITDA should
not be considered by an investor as an alternative to net income, as an
indicator of the Company's operating performance or as an alternative to
cash flow as a measure of liquidity. For the cash flows for each of the
Company and Pre-Acquisition ARI for the periods presented, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
(5) Excludes amortization of deferred financing costs included in interest
expense.
(6) A hundredweight is equivalent to 100 pounds. A metric ton is equivalent to
22.046 hundredweight.
(7) For purposes of calculating the ratio of earnings to fixed charges, earnings
are defined as earnings (loss) from continuing operations before income
taxes, plus fixed charges. Fixed charges consist of interest expense on all
indebtedness (including amortization of deferred debt issuance costs) and
the portion of operating lease rental expenses that is representative of the
interest factor (deemed to be one-third of the lease rentals). For the year
ended March 31, 1993, Comet's earnings were inadequate to cover fixed
charges by $9.6 million.
(8) EBITDA to pro forma cash interest expense, net of pro forma interest income
on average cash balance. Pro forma for the Offering, the Company is
estimated to have an average cash balance of $1.0 million earning 5.25% per
annum. EBITDA to pro forma cash interest expense, net of pro forma total
interest income would be 2.0x in fiscal 1995. For discussion of assumptions
and adjustments underlying the pro forma financial data, see "Pro Forma
Consolidated Financial Data."
(9) Represents total of notes payable, current portion of long-term debt and
long-term debt.
7
<PAGE> 12
RISK FACTORS
Prospective investors should consider carefully, in addition to the other
information contained or incorporated by reference in this Prospectus, the
following factors before purchasing the Mortgage Notes offered hereby.
HIGHLY LEVERAGED NATURE OF THE COMPANY
The Company is highly leveraged and will continue to be highly leveraged
after the consummation of the Offering. At June 30, 1995, ARI had Indebtedness
(including the current portion thereof) of approximately $84.3 million,
including approximately $26.6 million of borrowings under the Company's
Revolving Credit Loan. A portion of the net proceeds of the Offering will be
used to repay $77.5 million of ARI's existing Indebtedness, including all
amounts outstanding under the Revolving Credit Loan. See "Use of Proceeds." At
June 30, 1995, on a pro forma basis after giving effect to the Offering and the
repayment of such outstanding Indebtedness, ARI would have had no outstanding
senior Indebtedness other than $0.2 million under the Revolving Credit Loan and
$100.0 million represented by the Mortgage Notes, and ARI's stockholders' equity
would have been approximately $44.3 million. In addition, management expects
that on the Closing Date at least approximately $23.5 million will be available
to the Company for borrowing under the Revolving Credit Loan. See
"Capitalization." ARI may incur additional Indebtedness in the future, including
Indebtedness under the Revolving Credit Loan and by remarketing the Freeport
IRBs. See "Description of Certain Indebtedness."
The degree to which the Company is leveraged could have important
consequences to holders of the Mortgage Notes. For example, ARI's ability to
obtain additional financing in the future for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes may be
impaired. Furthermore, certain of ARI's existing and anticipated future
borrowings are and will continue to be at variable rates of interest, which
causes ARI to be vulnerable to increases in interest rates. See "Description of
Mortgage Notes" and "Description of Certain Indebtedness."
Based upon its current level of operations, the Company believes that its
cash flow from operations together with other available sources of liquidity
will be adequate to meet ARI's anticipated requirements for working capital,
capital expenditures, interest payments and scheduled principal payments.
Following the Offering, the Indenture will restrict ARI from incurring
additional Indebtedness (other than under the Revolving Credit Loan and
remarketing the Freeport IRBs) which requires principal payments prior to
maturity of the Mortgage Notes. The ability of the Company to make scheduled
payments or to refinance its obligations with respect to its Indebtedness
depends on its financial and operating performance, which, in turn is subject to
prevailing economic conditions and to financial, business and other factors,
many of which are beyond ARI's control. There can be no assurance, however, that
ARI will continue to generate cash flow sufficient to meet its obligations. In
any event, a refinancing of all or a portion of its Indebtedness may not be
available on terms acceptable to ARI, if at all, particularly in light of ARI's
high levels of Indebtedness, the pledge of its significant production and
intellectual property assets as security for the Mortgage Notes, the pledge of
substantially all of ARI's assets to secure certain other Indebtedness to which
ARI is or may become a party and the restrictive covenants in the Revolving
Credit Loan and the Indenture.
INTERNATIONAL OPERATIONS
The Company's foreign operations are exposed to certain political, economic
and other risks inherent in doing business abroad, including exposure to
potentially unfavorable changes in tax or other laws, partial or total
expropriation, and the risks of war, terrorism and other civil disturbances for
which the Company carries no insurance coverage. ARI's exports of rice products
to many countries are limited by government quotas, levies or other restrictions
or prohibitions on the importation of rice from the United States. In addition,
the Company's rice business has been adversely affected in the past by armed
conflicts, embargoes declared by the U.S. government, international political
disagreements, civil unrest and political instability. Certain markets for ARI's
rice products and certain of its operating facilities are located in developing
nations and there can be
8
<PAGE> 13
no assurance that the occurrence of such events will not disrupt the Company's
business in the future. The loss of any significant export rice market because
of these events or conditions could have a material adverse effect on the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
COMPETITION
While the Company maintains a significant market share in most of its
markets, the overall market for branded rice remains competitive both
domestically and abroad. In general, competition in both domestic and
international markets is based upon the quality of rice, brand recognition,
price, quality of service, seller relationships with the purchasers and the
ability to arrange financing. The Company's U.S. competitors in the domestic and
export milled rice markets include Riviana Foods Inc., Riceland Foods, Inc.,
Producers Rice Mills, Inc., Continental Grain Company, Cargill Inc. and Farmers
Rice Cooperative. There are other competitors in certain specialized marketing
areas, such as Mars, Inc. (Uncle Ben's), Philip Morris Companies, Inc. (Minute)
and the Quaker Oats Company (Rice-a-Roni), who typically have greater financial
and other resources than the Company and may devote substantially greater
resources to increase the amount of direct competition with the Company.
Currently, no domestic company has more than 25% of the United States rice
exporting business. In addition, the Company's competitors in the international
rice trading markets include marketers from other exporting countries such as
Thailand and Pakistan that compete on the basis of quality and price and
marketers from other countries such as Vietnam and Burma that compete primarily
based upon price. There can be no assurance that the Company will maintain its
market position or improve its financial performance. See
"Business -- Competition."
GOVERNMENT SUPPORT PROGRAMS
Price supports and other government programs have significant influence
over ARI's net sales. The adoption of the Food Security Act of 1985 opened world
markets to U.S. rice millers, processors and marketers and generally resulted in
increased throughput from higher domestic and export sales beginning in April
1986. This legislation provides subsidies to rice producers so that rice can be
milled at prices expected to be competitive in the world market. The Food
Security Act of 1985 originally was only applicable to crops produced through
1990; however, through the Food, Agriculture, Conservation and Trade Act of
1990, these price supports have been extended to crops produced through the crop
year 1995. There can be no assurance that the currently favorable provisions of
such legislation will be extended into future periods or will not be amended due
to budgetary or other governmental constraints. Proposals to significantly limit
or eliminate altogether federal farm price support programs have been introduced
in the United States Congress and if such legislation is enacted, there could be
a significant impact on the supply and price of U.S. grown rice. Management
believes that, should such a change occur, any adverse effect would be of
limited duration because (i) domestic prices would adjust to a point of economic
equilibrium with imports which would justify adequate production by U.S. growers
using alternate or fallow acreage and employing economies of scale and (ii) any
shortage of U.S. grown rice due to termination of price supports could be offset
by imports from other countries using ARI's cost efficient bulk handling
facilities at the Freeport, Texas deep water port and ARI's other strategically
located packaging facilities.
FLUCTUATIONS IN WORLD RICE PRICES
The Company buys its rough and milled rice on the open market from various
independent growers and suppliers at prices that are subject to worldwide market
fluctuations in rice prices. Historically, world market prices for rice have
fluctuated in response to a number of factors, including changes in domestic
governmental farm support programs, changes in international agriculture and
trading policies and weather conditions during the growing and harvesting
seasons in the world's major rice growing regions. Increases in rice prices can
have a significant adverse short-term effect on the Company's results of
operations. ARI's opportunities to reduce the risk of short-term fluctuations in
rice prices by utilizing the commodity futures market are limited by the
relatively small size of the existing rice futures market. Historically, the
volume of rice covered by futures
9
<PAGE> 14
contracts has been immaterial and management does not anticipate that this will
change. No assurance can be given that future fluctuations in world rice prices
will not have an adverse short-term effect on ARI's results of operations.
ABILITY TO REALIZE ON COLLATERAL
The Mortgage Notes will be secured by the Collateral pursuant to the
Collateral Documents (as defined), which include (i) the Freeport Deed of Trust
creating a second priority security interest in the Company's leasehold
interests in the Freeport Facility that is junior only to $13.3 million in
aggregate principal amount of the Company's Freeport IRBs, which currently are
held by the Company and will be pledged to the holders of the Mortgage Notes
until such time as the Company remarkets the Freeport IRBs in accordance with
the terms of the Indenture; (ii) the Maxwell Deed of Trust creating a first
priority security interest in the Company's fee and leasehold interests in the
Maxwell Facility; (iii) the Stuttgart Mortgage creating a first priority
security interest in the Company's fee interest in the Stuttgart Facility; (iv)
the Houston Deed of Trust creating a first priority security interest in the
Company's fee interest in the Houston Property; (v) pledge agreements creating
first priority security interests in the capital stock of the Company held by
ERLY (other than 200,000 shares of the Company's Series B Preferred Stock
pledged to the holders of the Company's Series C Preferred Stock), the capital
stock of the Company's subsidiaries held by the Company, the ERLY Intercompany
Notes and the Subsidiary Intercompany Notes; (vi) a security agreement creating
a first priority security interest in all registered U.S. trademarks, and a
security interest in all other registered trademarks, owned or licensed by the
Company; and (vii) a pledge of all proceeds of the foregoing. The Freeport
Facility is subject to a first deed of trust securing the Freeport IRBs, which
if foreclosed upon would extinguish the Lien (as defined) on the Freeport
Facility in favor of the Trustee and would result in the proceeds of a
foreclosure sale being applied first to the Freeport IRBs. The Collateral (other
than the capital stock of the Company and the Company's subsidiaries) is subject
to liens in favor of the lender under the Revolving Credit Loan that will be
subordinate to the liens in such Collateral granted to the Trustee under the
Collateral Documents. The rights of the Trustee and the lender under the
Revolving Credit Loan will be subject to the terms of an Intercreditor Agreement
(as defined), that will include the right of such lender, under the Revolving
Credit Loan, for a period of 90 days, to access and utilize the Company's rice
processing facilities to create additional inventory and affix the Company's
trademarks to such inventory, which right may adversely impact the ability of
the Trustee to sell such facilities and trademarks, and the value realized
therefrom, in the event of foreclosure under the Indenture and the Collateral
Documents. See "Description of Mortgage Notes -- Security."
The Trustee's ability to realize upon real property collateral is limited
and restricted by the laws of the applicable states in which the real property
is located. For example, California has adopted a "one-form-of-action rule,"
under which the trustor under a deed of trust on California real property may
require a creditor to exhaust its real property collateral before seeking a
judgment on the debt (whether in or out of California). Exercising a right of
setoff or otherwise proceeding against the trustor's assets in which the
creditor does not have a perfected Lien or failing to proceed against real
property collateral before seeking to enforce the trustor's obligations may
result in the loss of the liens on the real property and any right to pursue
other remedies, including a legal action to collect the debt. Moreover, such
consequences may also result from any such actions taken by a single holder of
Mortgage Notes. In addition, certain states, including California and Texas,
have adopted "anti-deficiency laws," which may restrict the ability of the
Trustee or the holders of the Mortgage Notes to obtain a deficiency judgment
against the Company after a foreclosure or limit the amount that may be
recovered in an action to recover deficiencies. In general, any foreclosure must
be conducted in accordance with the laws of the applicable states. Accordingly,
there can be no assurance that the holders of the Mortgage Notes will be able to
realize upon the Collateral in an amount sufficient to satisfy the Mortgage
Notes or that they will be able to obtain recourse against other assets of the
Company, even as unsecured creditors, if the value of the Collateral which is
foreclosed upon is insufficient to satisfy the Mortgage Notes.
The land, improvements and certain equipment at the Freeport Facility and a
portion of the land, improvements and equipment at the Maxwell Facility are
leasehold properties. Accordingly, the Liens upon such Collateral are subject to
the terms of the applicable leases and the rights of the landlords thereunder in
10
<PAGE> 15
the event of a breach of the lease, including the right to terminate the leases.
If any such lease were terminated, the Company would lose possession of the
leasehold properties and its ability to conduct operations on the premises, and
the Liens in favor of the Trustee would be extinguished. The terms of the leases
provide that notices of default must be delivered to a mortgagee of which the
landlord has notice (and the Indenture will require the Company to give notices
in accordance with the leases) and such mortgagee has certain rights to cure
certain defaults within specified time periods. However, the Trustee has no
obligation under the Indenture to cure such defaults unless so instructed by the
holders of a majority of the outstanding Mortgage Notes. There can, therefore,
be no assurance that any defaults under the leases will be timely cured, or that
the leases will not be terminated and, consequently, the Liens on the Collateral
lost. Further, the leases contain restrictions on assignment which may affect
the ability of the Trustee to dispose of the Collateral following a foreclosure.
Finally, if the Company or the landlord were to become the debtor in a
bankruptcy proceeding, the leases could be rejected, which may result in the
loss of the leasehold interests as Collateral, or may be assumed and assigned.
NO ASSURANCE AS TO VALUE OF ASSETS
If an Event of Default (as defined) occurs with respect to the Mortgage
Notes, there can be no assurance that the liquidation of the Collateral securing
the Mortgage Notes would produce proceeds in an amount sufficient to pay the
principal of or accrued and unpaid interest on the Mortgage Notes. The Company
has obtained appraisals dated as of May 31, 1995 and June 1, 1995, of the
Freeport Facility and the Maxwell Facility, respectively, together with the
Company's registered U.S. trademarks associated with each such facility, both on
a going concern basis, reflecting valuations of approximately $91.0 million and
$45.0 million, respectively. The Company did not obtain appraisals for the other
assets of the Company that constitute Collateral. Caution generally should be
exercised in evaluating appraisal results. An appraisal is only an estimate of
value and should not be relied upon as a proven measure of realizable value.
Moreover, a valuation of the Freeport Facility and the Maxwell Facility on a
liquidation basis likely would result in a significantly lower valuation than
reflected by the preliminary appraisals. It is likely that a forced sale of the
Collateral would provide proceeds far below the values set forth in the
preliminary appraisals.
CERTAIN BANKRUPTCY CONSIDERATIONS
The right of the Trustee to repossess and dispose of the Collateral upon
the occurrence of an Event of Default on the Mortgage Notes is likely to be
significantly impaired by applicable bankruptcy law if a bankruptcy proceeding
were to be commenced by or against the Company, whether by a holder of the
Mortgage Notes or another creditor (including a junior creditor), prior to such
repossession and disposition. Under applicable bankruptcy law, secured creditors
such as the holders of the Mortgage Notes are prohibited from repossessing their
security from a debtor in a bankruptcy case, or from disposing of security
repossessed from such debtor, without bankruptcy court approval. Moreover,
applicable bankruptcy laws permit debtors to continue to retain and to use the
collateral even though the debtor is in default under the applicable debt
instruments, provided that the secured creditor is given "adequate protection."
The meaning of the term "adequate protection" may vary according to
circumstances, but it is intended in general to protect the value of the secured
creditor's interest in the collateral and may include cash payments or the
granting of additional security, at such time and in such amount as the court in
its discretion may determine, for any diminution in the value of the collateral
as a result of the stay of repossession or disposition or any use of the
collateral by the debtor during the pendency of the bankruptcy case. In view of
the lack of a precise definition of the term "adequate protection" and the broad
discretionary powers of a bankruptcy court, it is impossible to predict how long
payments under the Mortgage Notes could be delayed following commencement of a
bankruptcy case, whether or when the Trustee could repossess or dispose of the
Collateral and whether or to what extent the holders of the Mortgage Notes would
be compensated for any delay in payment or loss of value of the Collateral
through the requirement of "adequate protection." If the bankruptcy court
determines that the value of the Collateral is not sufficient to repay the
Mortgage Notes, holders of the Mortgage Notes would not be permitted to receive
payments or accrue interest, costs or attorneys' fees during the term of the
case.
11
<PAGE> 16
CONTROL BY CERTAIN STOCKHOLDERS
The principal stockholders of ERLY, Gerald D. Murphy and his son, Douglas
A. Murphy, each of whom is a director and an officer of ERLY, are the direct and
indirect record and beneficial owners of 1,517,191 shares, representing
approximately 37.4% of the outstanding shares of common stock of ERLY, and
506,502 shares, representing 12.5% of the outstanding shares of common stock of
ERLY, respectively. Accordingly, by virtue of ERLY's direct control of the
Company (of which ERLY owns 81% of the voting power), in connection with matters
submitted to a vote of ERLY's shareholders, such as the election of ERLY's Board
of Directors, the Murphy's collectively will be able to significantly influence
the direction and future operations of the Company. See "Management" and
"Security Ownership of Certain Beneficial Owners and Management."
CHANGE OF CONTROL
The Indenture governing the Mortgage Notes provides that, upon the
occurrence of a Change of Control (as defined in the Indenture), the holders of
the Mortgage Notes will have the right to require the Company to repurchase
their Mortgage Notes at a price equal to the lesser of 101% or the optional
redemption price then applicable of the Accreted Value of the Mortgage Notes,
plus accrued and unpaid interest to the date of repurchase. In addition, a
Change of Control may constitute a default under the Revolving Credit Loan. If a
Change of Control were to occur, the Company may not have the financial
resources to repay all of its obligations under the Revolving Credit Loan, the
Indenture and any other indebtedness that may become payable upon the occurrence
of such Change of Control.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local laws, regulations and
ordinances that (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as handling
and disposal practices for solid and hazardous wastes, and (ii) impose liability
for the costs of cleaning up, and certain damages resulting from, sites of past
spills, disposals or other releases of hazardous materials (collectively,
"Environmental Laws"). The Company believes that it currently conducts its
operations, and in the past has operated its business, in substantial compliance
with applicable Environmental Laws. From time to time, operations of the Company
may result in noncompliance with or liability for cleanup pursuant to
Environmental Laws. However, the Company believes that any such noncompliance or
liability under current Environmental Laws would not have a material adverse
effect on its results of operations and financial condition. See
"Business -- Environmental Matters." Any environmental problems at the Company's
properties could adversely affect the value of the Collateral or the ability of
the Trustee to foreclose on the Collateral.
RECOGNITION OF INCOME AND RISK OF ADVERSE TAX CHARACTERIZATION
The Mortgage Notes will be issued with original issue discount, which will
require holders of the Mortgage Notes to recognize income for federal income tax
purposes prior to actual receipt of the cash to which that income is
attributable. See "Material Federal Income Tax Consequences."
The Mortgage Notes provide for payment of both Fixed Interest and
Contingent Interest, which is based on the Company's operating results and is
calculated as a fixed percentage of the Company's Consolidated Cash Flow for
such periods. The Mortgage Notes and the Indenture have legal and other economic
terms typically contained in instruments evidencing indebtedness and are
intended to create a debtor-creditor relationship between the Company and the
holders of the Mortgage Notes. Based on advice of tax counsel, the Company
intends to treat the Mortgage Notes as indebtedness for federal income tax
purposes. If the Company's treatment of the Mortgage Notes is not upheld, some
or all of the payments on the Mortgage Notes may be recharacterized and the
holders may face other adverse tax consequences, including recognition
12
<PAGE> 17
of income for federal income tax purposes prior to actual receipt of the cash to
which that income is attributable. See "Material Federal Income Tax
Consequences."
ABSENCE OF PUBLIC MARKET FOR THE MORTGAGE NOTES
Prior to the Offering, there has been no public market for the Mortgage
Notes. The Company has been advised by the Underwriter that it presently intends
to make a market in the Mortgage Notes after the Offering, as permitted by
applicable laws and regulations; however, the Underwriter is not obligated to do
so, and any such market making, if commenced, may be discontinued at any time
without notice. The Company does not intend to apply for the listing of the
Mortgage Notes on any national securities exchange and no assurance can be given
that an active public market for the Mortgage Notes will develop. If a market
for the Mortgage Notes does not develop or is not maintained, holders of
Mortgage Notes may not be able to resell the Mortgage Notes for an extended
period of time, if at all. If a market for the Mortgage Notes were to develop,
future trading prices of the Mortgage Notes will depend on many factors,
including, among other things, prevailing interest rates, the Company's results
of operations, the market for similar securities (which market is subject to
various pressures, including, but not limited to, fluctuating interest rates),
general economic conditions and other factors. No assurance can be given that a
holder of Mortgage Notes will be able to sell such Mortgage Notes in the future
or that such sale will be at a price equal to or greater than the initial
offering price of the Mortgage Notes. See "Underwriting."
13
<PAGE> 18
THE COMPANY
The Company's rice business dates back to 1901 when the predecessor company
to Comet was formed in Beaumont, Texas. Comet rice, named after the appearance
of Halley's Comet during a product presentation, was the first rice to be sold
in branded packages and was widely advertised and marketed as a brand of high
quality rice. In 1952, the predecessor company to Comet merged with Wonder Rice
Mills, Inc. of Stuttgart, Arkansas and Adolphus Rice Mills, Inc. of Houston,
Texas, which added the Wonder(R) and Adolphus(R) brand names to the product
line, as well as the Stuttgart Facility. This rice milling business was
purchased in 1970 by Early California Industries Inc. ("Early"), a California
company engaged in agribusiness. In 1972, Early formed Comet as a new subsidiary
into which Early transferred all of its rice business assets, including its
trademarks. In 1979, Comet acquired United Rice Growers and Millers which owned
the Maxwell Facility. This facility remains the Company's primary milling
facility in the California rice producing region. Early changed its name to ERLY
Industries Inc. in 1985.
In 1986, Comet and American Rice, Inc., a Texas agricultural cooperative
marketing association formed in 1969 comprised primarily of rice growers (the
"ARI Cooperative"), formed a joint venture known as Comet American Marketing
("CAM") for the purpose of conducting joint domestic marketing operations. In
connection with the formation of CAM, both companies contributed virtually all
of their domestic brands to CAM and Comet transferred certain processing and
packaging equipment, packaging supplies and production responsibilities to the
ARI Cooperative. ARI was incorporated in 1987 by the ARI Cooperative and in
1988, the ARI Cooperative contributed all of its assets to the Company in
exchange for 52% of ARI's voting capital stock, which the ARI Cooperative
distributed to its members. Comet obtained the remaining 48% of ARI's voting
capital stock in exchange for contributing to the Company cash and Comet's 50%
interest in CAM. On May 26, 1993, ERLY consolidated its ownership interests in
the Company and Comet through the Acquisition, pursuant to which ERLY
transferred all of the operating assets and liabilities of Comet to ARI in
exchange for shares of voting preferred stock that gave ERLY an additional 33%
of the voting power of ARI. As a result of the Acquisition, ERLY holds 81% of
the voting power of the Company, comprised of a 32% direct common stock equity
interest and an additional 49% voting preferred stock interest.
As a result of the Acquisition, the Company diversified the market for its
products, expanded its share of both the domestic and export rice markets,
increased its sources of supply of rough rice and reduced its operating costs.
The Acquisition reduced manufacturing and distribution costs and increased gross
margins by allowing ARI to process and package products closer to the ultimate
customer and thereby utilize total capacity more efficiently. The Acquisition
also enabled ARI to better utilize its milling facilities due to increased
availability of bank credit lines and working capital, which in turn allowed ARI
to purchase additional raw product from a larger growing area and to sell to
additional export markets. Management believes the Acquisition has significantly
improved ARI's ability to manage short-term fluctuations in the cost of rough
rice by expanding and further diversifying its markets for milled rice.
Management also believes the Acquisition will continue to favorably impact
future operating results as additional synergies from the Acquisition are fully
realized.
The chart below illustrates the current organizational structure of the
Company, its subsidiaries and its parent, ERLY, which holds 81% of the voting
power of the Company as a result of the Acquisition:
<TABLE>
<S> <C> <C> <C> <C> <C>
-------------------------
/ ERLY Industries, Inc. /
-------------------------
/ 81%
------------------------
/ American Rice, Inc. /
------------------------
/
----------------------------------------------------------------------------------------------------------
/ 90% / 100% / 100% / 100% / 100% / 55%
----------------- ----------------- ---------------- ------------------ ----------------- -----------------
Comet Rice Comet Rice
Comet Ventures, of Puerto Rico, of Jamaica Rice Corporation BargeCaribe, ARI-Vinafood
Inc. Inc. Limited of Haiti, S.A. Inc.
----------------- ----------------- ---------------- ------------------ ----------------- -----------------
</TABLE>
The common stock of ERLY is directly and indirectly owned of record and
beneficially in the aggregate percentage of 47.2% by Gerald D. Murphy, Douglas
A. Murphy and William H. Burgess, each of whom are directors of ARI and, in the
case of Gerald D. Murphy and Douglas A. Murphy, officers of ARI. See "Security
Ownership of Certain Beneficial Owners and Management" and "Management."
The Company's principal executive offices are located at 16825 Northchase
Drive, Suite 1600, Houston, Texas 77060, telephone number (713) 873-8800.
14
<PAGE> 19
USE OF PROCEEDS
The Company intends to use the proceeds from the sale of the Mortgage Notes
as follows (in millions):
<TABLE>
<S> <C>
Repayment of Revolving Credit Loan(1)........................................ $23.5
Repayment of Term Loan(2).................................................... 53.0
Repayment of Maxwell Mortgage(3)............................................. 1.0
Intercompany loan to ERLY(4)................................................. 10.5
Estimated fees and expenses.................................................. 6.0
-----
Total................................................................... $94.0
=====
</TABLE>
---------------
(1) Proceeds will be used to repay Indebtedness outstanding under the Company's
$47.5 million Revolving Credit Loan, which was amended as of June 30, 1995
(as amended, the "Revolving Credit Loan"). The Revolving Credit Loan bears
interest at the prime rate of interest plus 0.5% and will mature on May 24,
1996, subject to renewal. The outstanding loan balance on the Revolving
Credit Loan at March 31, 1995 was approximately $31.0 million and at June
30, 1995 was approximately $26.6 million. The Company anticipates that the
outstanding balance will be decreased by approximately $3.1 million prior to
the Closing Date. See "Certain Relationships and Related
Transactions -- Transactions with Affiliates." The average balance
outstanding during fiscal 1995 was approximately $23.1 million. The interest
rate on the Revolving Credit Loan ranged from 8.25% to 11.0% per annum over
the year ended March 31, 1995.
(2) Comprised of three term notes under a single loan agreement (the "Term
Loan"), which notes bear interest at varying rates. The blended rate of
interest for the Term Loan was 12.3% per annum at March 31, 1995. These
notes mature on September 27, 1996, March 31, 1997 and December 31, 1997.
(3) Represents a mortgage note with a remaining principal balance of
approximately $0.95 million secured by the Maxwell Facility, which bears
interest at an interest rate of 10% per annum and matures on October 1, 2000
(the "Maxwell Mortgage").
(4) The Company will make a loan to ERLY on the Closing Date that will be
evidenced by a promissory note payable to the Company (the "15% ERLY
Intercompany Note"), which will bear interest at an interest rate of 15% per
annum and mature one year and one day prior to the Maturity Date (as
defined). Under the terms of the 15% ERLY Intercompany Note, ERLY will be
obligated to pay principal and interest annually by offsetting payments (the
"Tax Sharing Payments") due ERLY from ARI under the Tax Sharing Agreement
(as defined). Such offsets shall be applied first to reduce principal (up to
$500,000), then to pay interest accrued and payable, and then to further
reduce outstanding principal. ERLY will be responsible for paying cash to
pay principal to the extent such offsets are less than $500,000 and may
defer payment of interest to the extent such offsets are not available for
such payment. The terms of the 15% ERLY Intercompany Note may not be
modified without the consent of a majority of the holders of the Mortgage
Notes. As security for the payments due on the 15% ERLY Intercompany Note,
ERLY will issue a warrant equivalent to 7.5% of the then issued and
outstanding voting common stock of ERLY, exercisable at $0.01 per share
after any payment default, which warrant will be reduced proportionally by
the amount of all principal payments made on the 15% ERLY Intercompany Note
and cancelled automatically upon payment in full of the principal of the 15%
ERLY Intercompany Note. As a proportion to total costs, fees and expenses
attributable to the $10.5 million loan are approximately $670,000. ERLY
intends to use the proceeds of the loan from the Company primarily to repay
a loan with an outstanding balance of approximately $9.6 million (the "Juice
Debt") owed to Internationale Nederlanden (U.S.) Capital Corporation ("ING
Capital") by ERLY Juice Inc., a wholly owned subsidiary of ERLY that has
discontinued operations, which Juice Debt is guaranteed by ERLY. Partial
consideration for the Company's loan to ERLY is the pledge by ERLY of the
ARI capital stock owned by ERLY (other than certain shares of preferred
stock previously pledged). ERLY holds 81% of the voting power of the Company
and shares some common officers and directors with the Company. See "Certain
Relationships and Related Transactions -- Transactions with Affiliates" and
"Security Ownership of Certain Beneficial Owners and Management."
15
<PAGE> 20
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at June 30, 1995, and as adjusted to give pro forma effect to the sale
of the Mortgage Notes and the application of the net proceeds therefrom. See
"Use of Proceeds." This table should be read in conjunction with the Company's
Consolidated Financial Statements and the notes thereto, included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1995
--------------------------
HISTORICAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
CASH AND CASH EQUIVALENTS............................................. $ 2,742 $ 0
======== ========
CURRENT DEBT:
Revolving Credit Loan............................................... $ 26,634 $ 192
Short-term notes(1)................................................. 3,866 3,866
Current portion of long-term debt................................... 6,727 --
-------- --------
Total current debt.......................................... 37,227 4,058
-------- --------
LONG-TERM DEBT, LESS CURRENT MATURITIES:
13% Mortgage Notes due 2002......................................... -- 94,000
Term Loan........................................................... 46,285 --
Maxwell Mortgage.................................................... 788 --
-------- --------
Total long-term debt, less current maturities............... 47,073 94,000
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $1.00 per share; 4,000,000 shares
authorized; 3,877,777 shares issued and outstanding.............. 3,878 3,878
Common stock, par value $1.00 per share; 10,000,000 shares
authorized; 2,443,892 shares issued and outstanding.............. 2,444 2,444
Additional paid-in capital.......................................... 25,286 25,286
Retained earnings................................................... 13,728 13,459
Cumulative foreign currency translation adjustments................. (748) (748)
-------- --------
Total stockholders' equity.................................. 44,588 44,319
-------- --------
TOTAL CAPITALIZATION.................................................. $ 128,888 $ 142,377
======== ========
</TABLE>
---------------
(1) Includes $3.8 million of short-term working capital loans payable by
ARI-Vinafood. See "Description of Certain Indebtedness -- ARI-Vinafood
Short-Term Notes."
16
<PAGE> 21
PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated financial data have been
prepared by the Company based upon certain adjustments to the Company's audited
financial statements for the year ended March 31, 1995. The pro forma condensed
consolidated operating data give effect to the Offering as if it had occurred on
April 1, 1994. The pro forma condensed consolidated balance sheet data give
effect to the Offering as if it had occurred on March 31, 1995. The pro forma
condensed consolidated financial data are not necessarily indicative of the
actual operating results or financial position that would have occurred or the
future operating results that will occur as a consequence of the Offering. This
information should be read in conjunction with "Capitalization," "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated Financial
Statements and the notes thereto, included elsewhere in this Prospectus.
PRO FORMA CONDENSED CONSOLIDATED OPERATING DATA
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1995
------------------------------------
OFFERING
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING DATA:
Net sales..................................................... $ 373,050 $ -- $ 373,050
Cost of sales................................................. 332,236 -- 332,236
-------- ------- --------
Gross profit................................................ 40,814 -- 40,814
Selling, general and administrative expenses.................. 23,235 -- 23,235
Interest expense(1)........................................... 12,344 3,414 15,758
Interest income(2)............................................ (727) (1,613) (2,340)
Other income.................................................. (153) -- (153)
-------- ------- --------
Pre-tax income.............................................. 6,115 (1,801) 4,314
Provision for income taxes(3)................................. 2,202 (648) 1,554
-------- ------- --------
Net earnings................................................ $ 3,913 $(1,153) $ 2,760
======== ======= ========
</TABLE>
---------------
<TABLE>
<S> <C> <C>
(1) The pro forma adjustment to interest expense is computed as follows (in
thousands):
$100.0 million of Mortgage Notes............................................... $13,000
$2.9 million of 15% short-term notes........................................... 441
Pro forma cash interest expense.............................................. 13,441
Contingent Interest on Mortgage Notes*......................................... 910
Less: interest expense related to existing debt................................ (12,344)
Amortization of $6.0 million of deferred financing costs related to the
Offering....................................................................... 857
Original issue discount........................................................ 550
Pro forma adjustment to interest expense..................................... $ 3,414
* Contingent Interest is computed based upon the Company's fiscal 1995 EBITDA
of $22.8 million and is not included in pro forma cash interest expense because
the Company's Adjusted Fixed Charge Coverage Ratio is less than 2.0x.
(2) The pro forma adjustment to interest income is computed as follows (in
thousands):
$10.5 million of 15% ERLY Intercompany Note.................................... $ 1,575
$11.9 million of 6% ERLY Intercompany Note (as defined)........................ 714
$1.0 million of 5.25% pro forma average cash balance........................... 51
Pro forma total interest income................................................ 2,340
Less: interest income related to existing ERLY Intercompany Notes and other
investments.................................................................... (727)
Pro forma adjustment to interest income...................................... $ 1,613
Pro forma cash interest expense, net of pro forma interest income on average
cash balance............................................................... $13,390
Pro forma cash interest expense, net of pro forma total interest income...... $11,101
(3) The pro forma income tax expense is computed based on an assumed effective tax rate of
36%.
</TABLE>
17
<PAGE> 22
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, 1995
----------------------------------------
OFFERING
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents................................. $ 1,864 $ (1,864) $ 0
Other current assets...................................... 87,872 -- 87,872
-------- -------- --------
Total current assets................................. 89,736 (1,864) 87,872
Property, plant and equipment, net........................ 41,386 -- 41,386
Other assets(1)........................................... 46,378 15,117 61,495
-------- -------- --------
Total assets......................................... $ 177,500 $ 13,253 $ 190,753
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Total debt(2)............................................. $ 89,237 $ 14,636 $ 103,873
Other liabilities(3)...................................... 44,051 (498) 43,553
Total stockholders' equity(3)............................. 44,212 (885) 43,327
-------- -------- --------
Total liabilities and stockholders' equity........... $ 177,500 $ 13,253 $ 190,753
======== ======== ========
</TABLE>
---------------
<TABLE>
<S> <C> <C> <C>
(1) Reflects the following adjustments to other assets (in thousands):
Deferred financing costs related to the Offering............... $ 6,000
15% ERLY Intercompany Note..................................... 10,500
Debt issuance costs related to existing debt................... (1,383)
--------
Increase in other assets.................................... $ 15,117
========
(2) Reflects the following adjustments to total debt (in thousands):
Reduction of existing debt..................................... $ (79,364)
Issuance of the Mortgage Notes................................. 94,000
--------
Increase in total debt...................................... $ 14,636
========
(3) Reflects write-off of debt issuance costs on existing debt, net of related income
taxes.
</TABLE>
18
<PAGE> 23
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables set forth selected consolidated financial data of the
Company for the years ended March 31, 1991 to 1995, for the three-month periods
ended June 30, 1994 and 1995, and for Pre-Acquisition ARI for the years ended
March 31, 1991 to 1993 and the period from April 1, 1993 to May 26, 1993. The
selected consolidated financial data are derived from the audited financial
statements of the Company and of Pre-Acquisition ARI, except for the period from
April 1, 1993 to May 26, 1993, and the three-month periods ended June 30, 1994
and 1995 which are unaudited. The unaudited financial statements include all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the results of operations for the period, all of which are of a
normal, recurring nature. The Company's consummation of the Acquisition on May
26, 1993 was accounted for as a purchase by Comet of stock in Pre-Acquisition
ARI in exchange for all of the operating assets and liabilities of Comet, and
following the Acquisition Comet distributed its equity interest in ARI to ERLY.
As a result, the Company's consolidated financial data prior to the Acquisition
reflects the operations of Comet rather than Pre-Acquisition ARI. Accordingly,
consolidated financial data of the Company contained in this Prospectus are not
directly comparable between fiscal years. The Company's audited financial
statements for the years ended March 31, 1991 to 1993 and the period from April
1, 1993 to May 26, 1993, included in the audited financial statements for the
year ended March 31, 1994, represent the results of the Company, including the
Company's share of Pre-Acquisition ARI results, using the equity method due to
the Company's 48% interest in Pre-Acquisition ARI prior to the Acquisition. For
all periods after May 26, 1993, the Company's Consolidated Financial Statements
include the results of Pre-Acquisition ARI and Comet. The information in the
tables should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Company's Consolidated
Financial Statements and the notes thereto, included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
COMET(1) ARI(1)
-------------------------------- --------------------------------------------
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
-------------------------------------------------------- --------------------
1991 1992(2) 1993(2) 1994 1995 1994 1995
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT RATIOS, PER SHARE AND PER HUNDREDWEIGHT DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales................................. $218,919 $214,090 $169,617 $284,464 $373,050 $105,706 $ 86,392
Gross profit.............................. 17,767 11,684 8,363 36,418 40,814 11,323 9,537
Selling, general and administrative
expenses................................ 7,646 8,419 10,779 21,497 23,235 5,272 5,771
Earnings (loss) before extraordinary
items................................... 716 (5,638) (11,265) 3,465 3,913 2,010 376
Primary earnings (loss) per share before
extraordinary items(3).................. -- -- -- $ (0.45) $ (0.83) $ 0.16 $ (0.45)
OTHER FINANCIAL DATA:
EBITDA(4)................................. $ 14,889 $ 7,828 $ 1,497 $ 19,839 $ 22,751 $ 7,326 $ 5,031
EBIT...................................... 12,046 5,190 (316) 16,017 18,501 6,281 3,998
Management fees........................... 1,925 1,925 2,100 1,096 922 230 232
Gross profit margin....................... 8.1% 5.5% 4.9% 12.8% 10.9% 10.7% 11.0%
Depreciation and amortization(5).......... $ 2,843 $ 2,638 $ 1,813 $ 3,822 $ 4,250 $ 1,045 $ 1,033
Capital expenditures...................... 2,923 772 2,651 2,844 3,562 1,625 1,422
Hundredweight of rice sold(6)............. 15,114 14,463 12,918 17,114 22,304 6,155 5,098
Net sales per hundredweight............... $ 14.48 $ 14.80 $ 13.13 $ 16.62 $ 16.73 $ 17.17 $ 16.94
Ratio of earnings to fixed charges(7)..... 1.4x -- -- 1.5x 1.4x -- 1.1x
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------------------------------- JUNE 30,
1991 1992 1993 1994 1995 1995
-------- -------- -------- -------- -------- --------
(IN THOUSANDS) (IN
THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 1,991 $ 1,057 $ 2,740 $ 1,721 $ 1,864 $ 2,742
Current assets............................ 76,661 76,335 32,681 86,448 89,736 75,449
Total assets.............................. 143,102 124,602 74,325 175,070 177,500 163,705
Total debt(8)............................. 88,709 81,160 47,953 95,084 89,237 84,300
Total stockholders' equity................ 25,596 19,304 12,699 40,299 44,212 44,588
</TABLE>
---------------
(Footnotes on following page)
19
<PAGE> 24
<TABLE>
<CAPTION>
PRE-ACQUISITION ARI(1)
---------------------------------------------------------
PERIOD FROM
YEAR ENDED MARCH 31, APRIL 1, 1993
------------------------------------ TO
1991 1992 1993 MAY 26, 1993(1)
-------- -------- -------- ---------------
(IN THOUSANDS, EXCEPT RATIOS, PER SHARE AND PER
HUNDREDWEIGHT DATA)
<S> <C> <C> <C> <C>
OPERATING DATA:
Net sales................................................... $198,462 $176,201 $176,619 $27,025
Gross profit................................................ 15,023 13,982 24,580 4,243
Selling, general and administrative expenses................ 14,776 13,104 14,163 2,380
Earnings (loss) before extraordinary items.................. (5,777) (5,432) 3,250 888
Primary earnings (loss) per share before extraordinary
items..................................................... $ (0.47) $ (0.44) $ 0.20 $ 0.06
OTHER FINANCIAL DATA:
EBITDA(4)................................................... $ 3,912 $ 4,308 $ 13,606 $ 2,356
EBIT........................................................ 547 1,178 10,536 1,863
Management fees............................................. 300 300 119 --
Gross profit margin......................................... 7.6% 7.9% 13.9% 15.7%
Depreciation and amortization(5)............................ $ 3,365 $ 3,130 $ 3,070 $ 493
Capital expenditures........................................ 830 517 762 31
Hundredweight of rice sold(6)............................... 14,058 12,026 12,645 1,361
Net sales per hundredweight................................. $ 14.12 $ 14.65 $ 13.97 $ 19.86
Ratio of earnings to fixed charges(9)....................... -- -- 1.4x 1.9x
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
------------------------------------
1991 1992 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 3,864 $ 1,251 $ 1,926
Current assets.............................................. 44,916 36,983 46,050
Total assets................................................ 105,957 95,515 102,178
Total debt(8)............................................... 65,300 67,196 64,116
Total stockholders' equity.................................. 18,633 13,201 16,451
</TABLE>
---------------
(1) On May 26, 1993, the Company consummated the Acquisition, which was
accounted for as a purchase of ARI by Comet. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note 1 to
the Company's Consolidated Financial Statements.
(2) For a discussion of the various factors affecting operating results during
the period indicated, such as the impact of the U.S. trade embargo of Iraq,
see "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Results of Operations."
(3) Represents primary earnings (loss) per share before extraordinary items
applicable to common stock after preferred stock dividend requirements.
Earnings per share are not presented for the years ended March 31, 1991 to
1993 because the data presented is that of Comet, which was a wholly owned
subsidiary of ERLY.
(4) EBITDA represents operating income before management fees, depreciation and
amortization. The Company has included EBITDA data (which are not a measure
of financial performance under generally accepted accounting principles)
because it understands such data are used by certain investors to determine
the Company's historical ability to service its indebtedness. EBITDA should
not be considered by an investor as an alternative to net income, as an
indicator of the Company's operating performance or as an alternative to
cash flow as a measure of liquidity. For the cash flows for each of the
Company and Pre-Acquisition ARI for the periods presented, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
(5) Excludes amortization of deferred financing costs included in interest
expense.
(6) A hundredweight is equivalent to 100 pounds. A metric ton is equivalent to
22.046 hundredweight.
(7) For purposes of calculating the ratio of earnings to fixed charges, earnings
are defined as earnings (loss) from continuing operations before income
taxes, plus fixed charges. Fixed charges consist of interest expense on all
indebtedness (including amortization of deferred debt issuance costs) and
the portion of operating lease rental expenses that is representative of the
interest factor (deemed to be one-third of the lease rentals). For the years
ended March 31, 1992 and 1993, earnings were inadequate to cover fixed
charges by $3.0 million and $9.6 million, respectively.
(8) Represents total of notes payable, current portion of long-term debt and
long-term debt.
(9) For purposes of calculating the ratio of earnings to fixed charges, earnings
are defined as earnings (loss) from continuing operations before income
taxes, plus fixed charges. Fixed charges consist of interest expense on all
indebtedness (including amortization of deferred debt issuance costs) and
the portion of operating lease rental expenses that is representative of the
interest factor (deemed to be one-third of the lease rentals). For the years
ended March 31, 1991 and 1992, earnings were inadequate to cover fixed
charges by $6.0 million and $5.4 million, respectively.
20
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Consolidated Financial Data" and the Company's Consolidated Financial Statements
and the notes thereto, included elsewhere in this Prospectus.
OVERVIEW
The Company purchases and processes rough rice into branded and commodity
rice for sale in both international and domestic markets. Demand for branded
rice products, which have accounted for approximately 70% of the Company's net
sales over the last two fiscal years, is relatively constant and margins are
typically higher than those for commodity rice products. Demand for commodity
rice products is relatively constant globally, but demand for U.S. grown
commodity rice is dependent upon supply and its cost relative to other sources
of supply. Supply and cost for both branded and commodity products depend on
many factors including governmental actions, crop yields and weather, and such
factors can persist through one or more fiscal years. An example of this
occurred in late 1993 when rough rice prices approximately doubled as a result
of shortages caused by poor weather conditions in Japan and the entry of Japan
into the world market as a net importer of rice. Following this significant
price increase, prices then fell from January 1994 to July 1994 by approximately
50% to September 1993 levels as supplies of rice in that country improved and
world markets stabilized.
The Company generally benefited from the price variability experienced in
the 1993 to 1994 period because the Company was able to increase sales prices in
some markets, the Company was able to sell rice inventories acquired at lower
prices at increased sales prices, and the Company participated in the Japanese
business through its California facilities. In general, management believes that
it is insulated from many of the effects of rough rice price fluctuations for
the following reasons: (i) the Company's net sales are proportionally weighted
towards relatively higher margin branded products, (ii) approximately one-half
of the Company's rough rice purchases, excluding rough rice milled under
contract for others, are made as spot market purchases and matched against
commodity orders at prices providing a favorable margin to costs, (iii) the
Company's high rice inventory turnover rate of approximately five times per year
reduces the Company's exposure to seasonal price fluctuations, and (iv) the
Company's diversity of rice sources and rice customers increases the ability of
the Company to take advantage of supply and demand imbalances.
21
<PAGE> 26
The Company competes in all major rice importing regions in the world,
including the Caribbean, Latin America, Middle East and Asia, as well as within
the United States and Canada. In fiscal 1995, the Company marketed rice in 44
foreign countries with no foreign country accounting for more than 13% of net
sales. The following tables summarize the regional concentrations of net sales
of the Company and Pre-Acquisition ARI during the past three years and for the
three months ended June 30, 1994 and June 30, 1995:
<TABLE>
<CAPTION>
COMET ARI
-------- -----------------------------------------
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
------------------------------ -------------------
1993 1994 1995 1994 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NET SALES BY REGION:
Domestic sales:
United States and Canada............... $ 77,199 $102,624 $129,271 $ 32,658 $ 31,431
-------- -------- -------- -------- --------
Export sales:
Middle East............................ 46,209 89,782 91,449 13,323 33,842
Caribbean, Mexico, and South America... 32,744 38,935 84,806 20,926 16,800
Asia................................... 670 42,838 49,963 36,481 3,842
Europe................................. 10,593 6,260 13,632 2,306 467
Africa................................. 2,114 4,012 3,864 -- --
Other.................................. 88 13 65 12 10
-------- -------- -------- -------- --------
Total export sales................... 92,418 181,840 243,779 73,048 54,961
-------- -------- -------- -------- --------
Total net sales........................... $169,617 $284,464 $373,050 $105,706 $ 86,392
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
PRE-ACQUISITION ARI
-------------------------
PERIOD FROM
YEAR ENDED APRIL 1, 1993
MARCH 31, TO MAY 26,
1993 1993
---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
NET SALES BY REGION:
Domestic sales:
United States and Canada................ $ 74,762 $ 9,438
---------- -------------
Export sales:
Middle East............................. 67,841 12,202
Caribbean, Mexico, and South America.... 24,388 818
Asia.................................... -- --
Europe.................................. 1,963 363
Africa.................................. 7,376 3,916
Other................................... 289 288
---------- -------------
Total export sales.................... 101,857 17,587
---------- -------------
Total net sales............................ $176,619 $ 27,025
======== =========
</TABLE>
ACQUISITION ACCOUNTING
Comet acquired a 48% voting interest in ARI on April 29, 1988 and an
additional 33% voting interest as a result of the Acquisition on May 26, 1993,
which was accounted for as a purchase by Comet of ARI. Because Comet was the
acquirer in the Acquisition for accounting purposes, the consolidated financial
data presented for periods prior to May 26, 1993 reflect only the operations of
Comet. As a result, historical operating results are not directly comparable
between fiscal years.
Management believes that an analysis of the Company's historical operating
results is more meaningful when combined with an understanding of the operating
results of Pre-Acquisition ARI for the period prior to the Acquisition and the
effects of the Acquisition on the Company's combined results. As shown by a
22
<PAGE> 27
comparison of the historical operating and financial data for the Company and
Pre-Acquisition ARI included in "Selected Consolidated Financial Data," the
Acquisition had a significant effect on the Company's results of operations and
financial position. In addition, understanding the historical operating results
of both ARI and Pre-Acquisition ARI is important because of the close
relationship between the companies that existed prior to the Acquisition, as
evidenced by, among other things, (i) a joint marketing agreement between the
ARI Cooperative and Comet that was implemented in 1986, (ii) Comet's ownership
of at least 48% of ARI's voting stock since 1988 and (iii) significant
intercompany transactions between Comet and ARI in periods prior to May 26,
1993.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1995 Compared with the Three Months Ended June 30,
1994
Net Sales. Net sales declined $19.3 million, or 18.3%, from $105.7 million
in the first quarter of fiscal 1995 to $86.4 million in the first quarter of
fiscal 1996. Of this decline, $18.0 million resulted from decreased export sales
and $1.2 million from decreased sales in the United States and Canada.
Export sales declined due to lower volume partially offset by higher
average prices. Total export sales volume declined approximately 2.5 million
equivalent rough rice hundredweight or 33%, accounting for a $24.0 million sales
decline. Average export prices increased approximately $2.00 per hundredweight
or 12%, accounting for $6.0 million in sales increases. Export volume was lower
primarily due to the lack of sales to Japan compared to the first quarter of the
prior year. It is expected that Japan will not be purchasing rice this year
until October, when it is anticipated it will begin purchasing rice pursuant to
its GATT (as defined) commitments of 379,000 metric tons (8.4 million
hundredweights) of rice for the twelve-month period beginning April 1, 1995 and
increasing to 758,000 metric tons (17.7 million hundredweights) annually by the
year 2000. ARI's sales to Asia totalled $42.8 million and $50.0 million in the
fiscal years ended March 31, 1994 and 1995, respectively. For the twelve-month
period ended August 1994, Japan imported 2.4 million metric tons of rice,
including approximately 500,000 metric tons from the United States. ARI
processed and milled approximately 62% of the tonnage from the United States.
Management believes that the United States has an excellent opportunity to
obtain more than half of the projected Japanese imports under GATT and that the
Company will have material involvement in supplying these requirements. See
"Business -- Brands and Markets -- Asia." This sales decline was partially
offset by higher sales to the Middle East. Domestic sales were lower as a result
of lower average prices partially offset by higher volume.
Gross Profit. Gross profit was 11% of net sales for both the first
quarters of fiscal 1995 and 1996. Gross profit declined $1.8 million, or 15.8%,
from $11.3 million in the first quarter of fiscal 1995 to $9.5 million in the
first quarter of fiscal 1996, due primarily to lower sales to Japan from the
Maxwell Facility partially offset by increases in gross profit from sales to the
United States, Canada and the Middle East.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.5 million, or 9.5%, from $5.3 million in
the first quarter of fiscal 1995 to $5.8 million in the first quarter of fiscal
1996. As a percentage of net sales, selling, general and administrative expenses
increased from 5.0% in the first quarter of fiscal 1995 to 6.7% in the first
quarter of fiscal 1996 due primarily to a higher proportion of branded sales in
the first quarter of fiscal 1996.
EBITDA. As a result of the foregoing, EBITDA declined $2.3 million, or
31.3%, from $7.3 million in the first quarter of fiscal 1995 to $5.0 million in
the first quarter of fiscal 1996. As a percentage of net sales, EBITDA declined
from 6.9% in the first quarter of fiscal 1995 to 5.8% in the first quarter of
fiscal 1996.
Interest Expense. Interest expense increased $0.5 million, or 17.3%, from
$2.9 million in the first quarter of fiscal 1995 to $3.4 million in the first
quarter of fiscal 1996 due to higher average interest rates partially offset by
lower average balances outstanding. Interest expense in both periods includes
amortization of capitalized debt issuance costs.
23
<PAGE> 28
Year Ended March 31, 1995 Compared with the Year Ended March 31, 1994
Net Sales. The Company's net sales increased $88.6 million, or 31.1%, from
$284.5 million in fiscal 1994 to $373.1 million in fiscal 1995. Export sales
increased by $61.9 million while domestic sales increased by $26.7 million.
Export sales improved primarily due to higher volume which increased by
approximately eight million equivalent rough rice hundredweight. Approximately
74% of this increase resulted from sales to the Caribbean, Mexico and South
America with the remaining improvements coming from the Asian and European
markets. Asian sales were primarily to Japan. Sales to Japan commenced in
January 1994 and continued through July 1994 at significant volumes. Sales to
Japan by the Company continued from August 1994 through the end of fiscal 1995,
but are inconsequential. Domestic sales benefited from higher average sales
prices which increased 14.5% primarily due to higher value-added retail sales
from ARI's existing customer base.
Pre-Acquisition ARI had net sales of $27.0 million during the period from
April 1, 1993 to May 26, 1993, which are not included in the Company's net sales
for fiscal 1994 of $284.5 million. On a combined basis, net sales of ARI and
Pre-Acquisition ARI (after eliminating intercompany sales of $0.2 million)
improved $61.8 million, or 19.9%, from fiscal 1994 to fiscal 1995 due to
increases in export sales, which accounted for $44.6 million, and increases in
domestic sales, which accounted for $17.2 million. Approximately 73% of this
increase in export sales resulted from greater sales to the Caribbean, Mexico
and South America, which was due in part to higher branded product sales in
Haiti and higher commodity sales in Brazil. Sales to Asia and Europe also
increased, but were partially offset by declines in sales to the Middle East and
Africa. Domestic sales increased by $17.2 million primarily due to higher volume
and an increase of 12.0% in average domestic prices attributable to generally
higher prices in the retail and food service markets and reduced quantities of
rough rice sales in fiscal 1995. Rough rice generally sells at a much lower
price per hundredweight than milled rice.
Gross Profit. Gross profit increased $4.4 million, or 12.1%, from $36.4
million in fiscal 1994 to $40.8 million in fiscal 1995, primarily due to higher
sales volume, partially offset by lower gross profit per hundredweight sold. As
a percentage of net sales, gross profit decreased from 12.8% in fiscal 1994 to
10.9% in fiscal 1995 as a result of reduced prices when Japanese demand abated
in August 1994 while the average cost of rough rice milled for markets in the
United States, the Caribbean, Mexico and South America increased.
Pre-Acquisition ARI had gross profit of $4.2 million during the period from
April 1, 1993 to May 26, 1993, which is not included in the Company's gross
profit for fiscal 1994 of $36.4 million. On a combined basis, after adjustments
of approximately $0.1 million to eliminate intercompany transactions, gross
profit increased $0.1 million, or 0.2%, from fiscal 1994 to fiscal 1995. As a
percentage of combined net sales, gross profit decreased from 13.1% in fiscal
1994 to 10.9% in fiscal 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.7 million, or 8.1%, from $21.5 million in
fiscal 1994 to $23.2 million in fiscal 1995. As a percentage of net sales,
selling, general and administrative expenses declined from 7.6% in fiscal 1994
to 6.2% in fiscal 1995 due to greater net sales without corresponding increases
in fixed selling and administrative expenses.
Pre-Acquisition ARI had selling, general and administrative expenses of
$2.4 million during the period from April 1, 1993 to May 26, 1993, which are not
included in the Company's selling, general and administrative expenses for
fiscal 1994 of $21.5 million. On a combined basis, after adjustments of
approximately $0.2 million to adjust management fees and amortization expenses
associated with the Acquisition, selling, general and administrative expenses
decreased $0.5 million, or 2.1%, from fiscal 1994 to fiscal 1995. As a
percentage of combined net sales, selling, general and administrative expenses
decreased from 7.6% in fiscal 1994 to 6.2% in fiscal 1995.
EBITDA. As a result of the foregoing, EBITDA increased $3.0 million, or
14.7%, from $19.8 million in fiscal 1994 to $22.8 million in fiscal 1995. As a
percentage of net sales, EBITDA decreased from 7.0% in fiscal 1994 to 6.1% in
fiscal 1995.
Pre-Acquisition ARI had EBITDA of $2.4 million during the period from April
1, 1993 to May 26, 1993, which is not included in the Company's EBITDA for
fiscal 1994 of $19.8 million. On a combined basis, after adjustments of
approximately $0.1 million to eliminate intercompany transactions, EBITDA
improved $0.5
24
<PAGE> 29
million, or 2.2%, from $22.3 million in fiscal 1994 to $22.8 million in fiscal
1995. As a percentage of combined net sales, EBITDA decreased from 7.2% in
fiscal 1994 to 6.1% in fiscal 1995.
Interest Expense. Despite lower average balances outstanding, interest
expense increased $2.5 million, or 24.9%, from fiscal 1994 to fiscal 1995 due to
higher average effective interest rates. Interest expense in both periods
includes amortization of capitalized debt issuance costs and other expenses
directly associated with the Company's debt.
Year Ended March 31, 1994 Compared with the Year Ended March 31, 1993
Net Sales. Net sales improved $114.9 million, or 67.7%, from $169.6
million in fiscal 1993 to $284.5 million in fiscal 1994. Of this increase, $89.4
million resulted from increased export sales and $25.5 million from increased
domestic sales, both primarily as a result of the Acquisition.
Pre-Acquisition ARI had net sales of $176.6 million in fiscal 1993 and
$27.0 million during the period from April 1, 1993 to May 26, 1993, which are
not included in the Company's net sales for fiscal 1993 of $169.6 million or
fiscal 1994 of $284.5 million. On a combined basis, net sales of ARI and
Pre-Acquisition ARI (after eliminating intercompany sales of $37.1 million and
$0.2 million for fiscal 1993 and fiscal 1994, respectively) improved $2.2
million, or 0.7%, from fiscal 1993 to fiscal 1994 due to increases of export
sales, which accounted for $13.5 million, while domestic sales fell by $11.3
million. Export sales increased primarily due to higher volume, which increased
approximately 4.3% or $8.1 million, and higher average prices, which improved
3.0% or $5.4 million. Volume increases resulted from exports to Japan and Haiti
and greater exports by the Company's 90%-owned subsidiary, Comet Ventures, Inc.
("CVI"). Total sales for CVI, a producer of specialty rice products and rice
ingredients, more than tripled in fiscal 1994 to $10.1 million due to increases
in customer demand. Domestic sales declined due to decreased volume caused by
redirecting rice sales to more profitable export markets such as Japan.
Gross Profit. Gross profit improved $28.0 million, or 335.5%, from $8.4
million in fiscal 1993 to $36.4 million in fiscal 1994. As a percentage of net
sales, gross profit increased from 4.9% in fiscal 1993 to 12.8% in fiscal 1994.
This increase in gross profit was primarily a result of additional sales to
customers acquired in the Acquisition and additional domestic and export sales.
Exports to Japan from the Maxwell Facility contributed to significant gross
profit increases, and the CVI, Haiti and Puerto Rico subsidiaries also reported
significant improvements in gross profits. The increase in gross profit as a
percentage of net sales was primarily due to higher value-added sales in the
U.S. and Middle East markets resulting from an expanded customer base due to the
Acquisition.
Pre-Acquisition ARI had gross profit of $24.6 million in fiscal 1993 and
$4.2 million during the period from April 1, 1993 to May 26, 1993, which is not
included in the Company's gross profit for fiscal 1993 of $8.4 million or fiscal
1994 of $36.4 million. On a combined basis, after adjustments of approximately
$1.0 million and $0.1 million for fiscal 1993 and fiscal 1994, respectively, to
eliminate intercompany transactions and conform inventory accounting methods,
gross profit increased $6.7 million, or 19.9%, from fiscal 1993 to fiscal 1994.
As a percentage of combined net sales, gross profit increased from 11.0% in
fiscal 1993 to 13.1% in fiscal 1994 as a result of increased exports to Japan
from ARI's California processing facilities and improvements in gross profit
from CVI and in the Haitian and Puerto Rican markets.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $10.7 million, or 99.4%, from $10.8 million in
fiscal 1993 to $21.5 million in fiscal 1994. As a percentage of net sales,
selling, general and administrative expenses increased from 6.4% in fiscal 1993
to 7.6% in fiscal 1994. This increase was primarily due to advertising and
selling expenses associated with greater sales of higher margin branded
products.
Pre-Acquisition ARI had selling, general and administrative expenses of
$14.2 million in fiscal 1993 and $2.4 million during the period from April 1,
1993 to May 26, 1993, which are not included in the Company's selling, general
and administrative expenses for fiscal 1993 of $10.8 million or fiscal 1994 of
$21.5 million. On a combined basis, selling, general and administrative expenses
remained relatively constant from fiscal 1993 to fiscal 1994, expressed both in
total dollars and as a percentage of net sales.
25
<PAGE> 30
EBITDA. As a result of the foregoing, EBITDA increased $18.3 million, or
1,225.3%, from $1.5 million in fiscal 1993 to $19.8 million in fiscal 1994, due
primarily to the Acquisition. As a percentage of net sales, EBITDA increased
from 0.9% in fiscal 1993 to 7.0% in fiscal 1994.
Pre-Acquisition ARI had EBITDA of $13.6 million in fiscal 1993 and $2.4
million during the period from April 1, 1993 to May 26, 1993, which is not
included in the Company's EBITDA for fiscal 1993 of $1.5 million or fiscal 1994
of $19.8 million. On a combined basis, after adjustments of approximately $1.0
million and $0.1 million for fiscal 1993 and fiscal 1994, respectively, to
eliminate intercompany transactions and conform inventory accounting methods,
EBITDA improved $6.2 million, or 38.1%, from $16.1 million in fiscal 1993 to
$22.3 million in fiscal 1994. As a percentage of combined net sales, EBITDA
increased from 5.2% in fiscal 1993 to 7.2% in fiscal 1994.
Interest Expense. Interest expense increased $4.7 million, or 88.9%, from
fiscal 1993 to fiscal 1994 due to higher average rates and balances. The higher
balances in fiscal 1994 were principally as a result of the Acquisition.
Interest expense in fiscal 1994 includes amortization of capitalized debt
issuance costs and other expenses directly associated with the Company's debt.
Year Ended March 31, 1993 Compared with the Year Ended March 31, 1992
Net Sales. Net sales decreased $44.5 million, or 20.8%, from $214.1
million in fiscal 1992 to $169.6 million in fiscal 1993. Export sales accounted
for a decrease of $54.0 million which was partially offset by increases in
domestic sales of $9.5 million. For the third consecutive year, net sales
declined due to the embargo of trade with Iraq imposed by the U.S. government in
August 1990 that caused export sales to decrease for the entire U.S. rice
industry. The Company was a major supplier to Iraq from its Greenville,
Mississippi, facility (the "Greenville Facility") and suffered a sales decline
of $93.0 million in fiscal 1991 and $21.5 million in fiscal 1992 due to the loss
of this customer. As a result of cost cutting measures implemented by the
Company and in anticipation of the Acquisition, disposition of the Greenville
Facility by foreclosure under a non-recourse obligation secured by the
Greenville Facility (the "Greenville Disposition") occurred in July 1992. The
Greenville Disposition allowed processing of rice for the most profitable export
business of both Comet and Pre-Acquisition ARI to be processed in the Freeport
Facility. This resulted in lower sales to all markets except the Middle East.
Opportunities for increased profit margins from sales to Turkey caused increased
sales from the Maxwell Facility. Sales to South America in fiscal 1992 were
primarily rough rice sales which became uneconomical in fiscal 1993 due to
changes in world supply and demand. Therefore, average sales price per
hundredweight for export rice declined by only 11.3%, while export volume
decreased by 28.7%. Domestic sales increased in fiscal 1993 by $9.5 million, or
14.1%, from fiscal 1992 primarily due to an increase in volume of 22.9%. Average
sales price per hundredweight for domestic rice decreased by 7.2% from fiscal
1992 to fiscal 1993.
Pre-Acquisition ARI had net sales of $176.2 million in fiscal 1992 and
$176.6 million in fiscal 1993, which are not included in the Company's net sales
for fiscal 1992 of $214.1 million and fiscal 1993 of $169.6 million. On a
combined basis, after adjustments to eliminate intercompany sales of
approximately $47.5 million and $37.1 million for fiscal 1992 and fiscal 1993,
respectively, net sales of ARI and Pre-Acquisition ARI decreased $33.7 million,
or 9.8%, from fiscal 1992 to fiscal 1993.
Gross Profit. Gross profit decreased $3.3 million, or 28.4%, from $11.7
million in fiscal 1992 to $8.4 million in fiscal 1993. As a percentage of net
sales, gross profit decreased from 5.5% in fiscal 1992 to 4.9% in fiscal 1993
primarily as a result of lower volume and fixed processing costs. Although lower
rough rice costs and reduced fixed expenses resulting from the disposition of
the Greenville Facility allowed cost of sales to decline, costs did not decline
proportionately with sales declines. The Puerto Rico operations did not
contribute gross profit due to expenses associated with the closure of the
Puerto Rico facility. However, in order to maintain a market presence in Puerto
Rico, the Company shipped bulk milled rice for packing under the Company's brand
names in Puerto Rico by a third party. Operations in Jamaica suffered losses due
to continued preferential tariffs imposed by the Jamaican government causing a
competitive disadvantage for commercial sales of U.S. grown rice.
26
<PAGE> 31
Pre-Acquisition ARI had gross profit of $14.0 million in fiscal 1992 and
$24.6 million in fiscal 1993, which is not included in the Company's gross
profit for fiscal 1992 of $11.7 million or fiscal 1993 of $8.4 million. On a
combined basis, after adjustments of approximately ($0.5) million and $1.0
million for fiscal 1992 and fiscal 1993, respectively, to eliminate intercompany
transactions and conform inventory accounting methods, gross profit increased
$8.9 million, or 35.1%, from fiscal 1992 to fiscal 1993. As a percentage of
combined net sales, gross profit increased from 7.3% in fiscal 1992 to 11.0% in
fiscal 1993.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.4 million, or 28.0%, from $8.4 million in
fiscal 1992 to $10.8 million in fiscal 1993. As a percentage of net sales,
selling, general and administrative expenses increased from 3.9% in fiscal 1992
to 6.4% in fiscal 1993 due to an increase in the allowance for doubtful
accounts.
Pre-Acquisition ARI had selling, general and administrative expenses of
$13.1 million in fiscal 1992 and $14.2 million in fiscal 1993, which are not
included in the Company's selling, general and administrative expenses for
fiscal 1992 of $8.4 million or fiscal 1993 of $10.8 million. On a combined
basis, selling, general and administrative expenses increased $3.4 million, or
16.8%, from fiscal 1992 to fiscal 1993. As a percentage of combined net sales,
selling, general and administrative expenses increased from 5.9% in fiscal 1992
to 7.7% in fiscal 1993.
EBITDA. As a result of the foregoing, EBITDA decreased $6.3 million, or
80.9%, from $7.8 million in fiscal 1992 to $1.5 million in fiscal 1993. As a
percentage of net sales, EBITDA decreased from 3.7% in fiscal 1992 to 0.9% in
fiscal 1993.
Pre-Acquisition ARI had EBITDA of $4.3 million in fiscal 1992 and $13.6
million in fiscal 1993, which is not included in the Company's EBITDA for fiscal
1992 of $7.8 million or fiscal 1993 of $1.5 million. On a combined basis, after
adjustments of approximately ($0.5) million and $1.0 million in fiscal 1992 and
fiscal 1993, respectively, to eliminate intercompany transactions and conform
inventory accounting methods, EBITDA improved $4.5 million, or 38.8%, from $11.6
million in fiscal 1992 to $16.1 million in fiscal 1993. As a percentage of
combined net sales, EBITDA increased from 3.4% in fiscal 1992 to 5.2% in fiscal
1993.
Interest Expense. Interest expense declined by $2.8 million, or 35.2%,
from fiscal 1992 to fiscal 1993 due to the elimination of the non-recourse
indebtedness related to the Greenville Facility, lower average borrowings due to
lower average inventories and lower average interest rates.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires liquidity and capital primarily for the purchase of
rough rice and to invest in property, plant and equipment necessary to support
operations. Historically, the Company has financed both working capital and
capital expenditure requirements through internally generated funds and by funds
provided by a line of credit.
The following table sets forth the Company's and Pre-Acquisition ARI's
sources (uses) of cash from operating, investing and financing activities for
the periods indicated:
<TABLE>
<CAPTION>
COMET ARI
-------------------------------- --------------------------------------------
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
-------------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1994 1995
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FROM:
Operating activities......... $ 9,544 $ 8,580 $ 19,781 $(12,361) $ 9,547 $ 14,941 $ 7,263
Investing activities......... (7,427) (548) (70) 12,687 (3,514) (1,624) (1,422)
Financing activities......... (1,206) (8,966) (18,028) (1,345) (5,890) (12,702) (4,963)
</TABLE>
<TABLE>
<CAPTION>
PRE-ACQUISITION ARI
--------------------------------
YEAR ENDED MARCH 31,
--------------------------------
1991 1992 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FROM:
Operating activities......... $ 15,833 $ (2,173) $ 4,412
Investing activities......... (733) (440) (657)
Financing activities......... (11,450) -- (3,080)
</TABLE>
27
<PAGE> 32
The Company's Board of Directors has adopted a resolution authorizing
management to sell the Houston Property. Management believes that the net
realizable value of this property exceeds its current carrying value of
approximately $18.3 million. The Houston Property constitutes a portion of the
Collateral.
Capital expenditures for the three months ended June 30, 1995 were $1.4
million and in fiscal 1995 were approximately $3.6 million. Capital expenditures
are expected to average approximately $2.5 million per year from fiscal 1996 to
fiscal 2000 to maintain the existing level of operations. Management believes
this level of annual capital expenditures is reasonable given the extended life
of machinery and equipment used for the processing and milling of rice. In
addition, the Company's business strategy requires additional capital
expenditures of up to $3.0 million per year after fiscal 1995 to increase
manufacturing capacity. This increased capacity will be used primarily to allow
the Company to market additional product to growing markets such as Iran, Mexico
and Europe.
The Company executed an amendment to the Revolving Credit Loan, effective
as of June 30, 1995. The $47.5 million Revolving Credit Loan bears interest at
the prime rate of interest plus 0.5% and will mature on May 24, 1996. Funds
available for borrowing under the Revolving Credit Loan at any time may not
exceed 85% of eligible accounts receivable (or 90% of accounts receivable backed
by acceptable letters of credit from customers) and 70% of eligible inventory.
The outstanding loan balance on the Revolving Credit Loan at March 31, 1995 was
approximately $31.0 million and the availability for borrowing was approximately
$41.9 million. At June 30, 1995, the outstanding loan balance was approximately
$26.6 million. Management expects to reduce the balance outstanding under the
Revolving Credit Loan to zero with the proceeds of the Offering. The average
balance outstanding under the Revolving Credit Loan during fiscal 1995 was
approximately $23.1 million.
ARI is required by the terms of the Term Loan and the Revolving Credit Loan
to maintain a minimum net book value, working capital, and certain financial
ratios. ARI was not in compliance with all such financial ratio requirements as
of June 30, 1995, but ARI has requested and received waivers from its lenders
for ratios that were not in compliance. Proceeds from the sale of the Mortgage
Notes will be used to repay and retire the Term Loan and repay all amounts
outstanding under the Revolving Credit Loan. See "Use of Proceeds."
The Company intends to satisfy its obligations under the Mortgage Notes, as
well as its future capital expenditure and working capital requirements,
primarily with cash flow from operations. Management believes that cash flow
from operations and a line of credit available under the Revolving Credit Loan
will provide sufficient liquidity to enable it to meet its currently foreseeable
working capital and capital expenditure requirements.
28
<PAGE> 33
BUSINESS
COMPANY OVERVIEW
The Company is the largest U.S.-based and one of the world's leading
processors and marketers of branded rice products, with leading brand positions
in many U.S. markets as well as Saudi Arabia, Haiti, Puerto Rico and certain
other rice consuming markets. The Company annually markets approximately 15% of
the total U.S. rice crop and is the only marketer of rice in the world with
significant sources of rough rice and milling facilities in the two major rice
producing regions of the United States as well as certain strategic locations
overseas. This allows ARI to moderate the impact of regional trade imbalances
caused by climate and geopolitical factors on operating performance. The Company
is able to maximize its margins by purchasing rice grown domestically and abroad
to take advantage of regional cost and supply availabilities.
Approximately 70% of the Company's net sales over the last two fiscal years
has been attributable to sales of branded rice, which typically commands a
higher price and profit margin than commodity rice and is less susceptible to
decreases in sales volume due to increases in consumer prices. With leading
brand names that sustain the number one or two positions in many of the major
domestic rice markets, ARI typically is able to achieve high margins in these
branded markets. ARI markets white rice, instant rice, parboiled rice, brown
rice and rice mixes under proprietary, trademarked brand names such as Blue
Ribbon(R), Comet(R), Adolphus(R), AA(R), Cinta Azul(R), Wonder(R), Colusa
Rose(R) and Chopstick(R). ARI is a leading marketer of U.S. rice in many of the
world's major rice importing countries, including Saudi Arabia, Haiti and
Turkey. In Saudi Arabia, the third largest import rice market in the world, the
Chopstick(R) brand, known locally as Abu Bint(R), has been the number one brand
of U.S. grown rice sold in that country since 1979, and has consistently
represented over two-thirds of the U.S. grown rice sold in that country. ARI's
leading brand names and broad product lines have facilitated the Company's
penetration into new markets and introduction of new products in existing
markets.
ARI recently entered into the ARI-Vinafood joint venture with a company
owned by the Socialist Republic of Vietnam to process and market Vietnamese
grown rice. ARI's 55% ownership in ARI-Vinafood enables it to participate in the
world market for Asian origin rice, the largest market segment in the world rice
market. Management believes that this new product source will enable it to
increase its market share in certain key regions as well as provide a
competitive product under its existing brand names to major rice consuming
markets in Asia and South America. See "-- Brands and Markets -- Asia."
Consistent with its past history of growth, the Company may in the future
acquire other interests or other businesses related to agriculture or food.
The Company believes that the depth, experience and ability of its
management team represents a significant competitive advantage. The Company's
executive officers average over 17 years of industry experience and are led by
Douglas A. Murphy, President and Chief Executive Officer, who has been with the
Company since 1982.
BUSINESS STRATEGY
The Company's business strategy is to increase net sales and cash flow by
implementing the following:
BUILD UPON BRAND LEADERSHIP. Strengthen existing and build new premium,
high margin brands on a worldwide basis and utilize Company-owned or controlled
processing, distribution and marketing systems to ensure superior product
quality and customer service.
CONTINUE EXPANSION INTO NEW MARKETS. Continue to expand and diversify its
customer base and enter new domestic and international markets with its branded
products.
INCREASE DIVERSITY OF SOURCES. Continue to diversify sources of supply as
new opportunities arise to obtain the greatest variety of products on a cost
competitive basis.
IMPROVE SIZE AND SCALE EFFICIENCY. Capitalize on new industry technologies
as they develop and expand ARI's use of innovative bulk handling procedures to
realize increased margins from lower cost operations.
29
<PAGE> 34
INDUSTRY OVERVIEW
Rice is the primary staple food consumed in most countries and is the
cereal grain with the highest level of human consumption in the world,
comprising approximately 40% of world cereal grain consumption. Primarily as a
result of population increases, world rice consumption has increased
approximately 125% during the last 30 years to approximately 350 million metric
tons in 1994. Domestic consumption of rice has more than doubled since 1984 and
currently exceeds 3.3 million metric tons annually. The increase in U.S. rice
consumption is primarily due to the substantial population growth of certain
ethnic groups and, to a lesser degree, increased awareness by the general
population of the impact of diet on health. Measured on a per capita basis,
average consumption of rice is estimated at 140 pounds per person on a worldwide
basis, with most Asian countries having per capita annual consumption in excess
of 200 pounds and the United States having one of the lowest at 23 pounds. Based
on statistics compiled by the United States Department of Agriculture
("U.S.D.A."), the following graph summarizes worldwide milled rice consumption
and demonstrates stable growth for the period indicated:
WORLDWIDE MILLED RICE CONSUMPTION
<TABLE>
<CAPTION>
TOTAL
POUNDS CONSUMPTION
PER (HUNDRED)
PERSON THOUSANDS TONS)
<S> <C> <C>
62 115.3 149200
63 111.4 151300
64 118.7 165200
65 126.4 179800
66 120.4 172600
67 122.3 178700
68 125.5 187000
69 126 191700
70 129.1 200200
71 133.5 210900
72 136.5 216800
73 137.5 214700
74 138.5 223200
75 134.7 226800
76 138.6 233300
77 141.4 238000
78 146 245800
79 150.6 253500
80 144 259200
81 153.4 276100
82 158.4 285000
83 159.7 287300
84 169.6 305200
85 141.7 310800
86 150.5 319700
87 151.7 322300
88 146.7 321800
89 150.3 329700
90 153.9 337700
91 141.3 347600
92 149.3 352200
93 154.3 370400
94 154.6 371000
</TABLE>
International Trade. While over 95% of the rice grown worldwide is
consumed in the country in which it is grown, international trade in rice has
expanded steadily over the last decade from approximately 11 million metric tons
in 1984 to nearly 16 million metric tons in 1994, representing an increase of
over 45%, and it is anticipated that such trade will expand to nearly 17 million
metric tons for the year ending 1995. The demand for rice over time has
increased proportionately with population increases, coupled with expansion in
per capita consumption, and has exceeded agricultural productive capacity in
some countries. In addition, due to the economic collapse of the former Soviet
bloc nations, certain foreign government agricultural support programs have been
reduced. This has reduced supply and increased international trade demand.
The world's major rice producing countries include China, India, Indonesia,
Bangladesh, Thailand, Vietnam and the United States, with China and India
accounting for over 50% of world rice production. Thailand is the largest
exporter of rice in the world, exporting approximately 32% of total world rice
exports, followed by the United States and Vietnam, whose exports account for
18% and 14%, respectively, of the world rice trade. The following graph shows
historical and projected exports for major rice producing countries for the
period indicated:
30
<PAGE> 35
EXPORTS BY MAJOR RICE PRODUCING COUNTRIES
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Thailand 4798000 4750000 4900000
U.S. 2644000 2794000 2800000
Vietnam 1765000 2000000 2000000
Pakistan 937000 1375000 1300000
Burma 223000 650000 1000000
India 625000 600000 1000000
China 1374000 1519000 500000
Australia 500000 600000 500000
Argentina 276000 225000 300000
</TABLE>
Historically, the largest rice importing nations have included Brazil, Iran
and Saudi Arabia with each nation importing in excess of 750,000 metric tons
annually. Recently, imports have begun to increase to the former Soviet bloc
nations due to reduced production levels in those countries. In addition, due to
the effects of adverse weather conditions in Japan in 1993, Japan was the
world's largest importer of rice, with imports estimated at 2.4 million metric
tons.
Rice produced in the United States is generally high quality and sells at
premium prices relative to Asian rice. Based on statistics compiled by the
U.S.D.A., exports of milled rice produced in the United States have sustained
consistent growth over the last 20 years, growing from an average of 1.8 million
metric tons per year in the years from 1972 to 1974 to an average of 2.6 million
metric tons per year in the years from 1993 to 1994. The U.S.D.A. forecasts that
the United States will export 2.7 million metric tons of rice in 1995.
In the future, international trade is expected to be impacted favorably by
the effects of the General Agreement on Tariff and Trade ("GATT"). The latest
round of amendments to GATT were approved on December 15, 1993 by the majority
of developed nations in the world, including the United States, the European
Union and Japan. Most signatory countries began implementation of their GATT
commitments on January 1, 1995, which required, with some exceptions, the
elimination of all import bans, and the reduction of all import tariffs. In the
case of Japan and South Korea, which were not required to eliminate rice import
bans, highly beneficial quotas were established through bilateral negotiations.
Japan has committed to import 379,000 metric tons of rice in 1995, increasing
each year to 758,000 metric tons by 2000. Commencing in the summer of 1995,
South Korea's quota is 51,000 metric tons, which they have agreed to double by
1999 and double again by 2004. In general, reductions on tariffs will make
imports more attractive to foreign buyers and consumers and more competitive
with domestic products. Under GATT, developed countries are committed to reduce
tariffs by an average of 36% over six years, with a minimum of a 15% reduction
on any individual item. Developing nations will reduce tariffs 24% over 10 years
and must meet a minimum 10% per item reduction. Management believes that the net
effect of GATT will be to stimulate additional rice production on additional
acreage in the United States and will increase the amount of rice traded
globally.
Domestic Trade. U.S. consumption of rice has more than doubled since 1984
and currently exceeds 3.3 million metric tons per year. U.S. per capita
consumption of rice has more than doubled since 1978 primarily due to increases
in the population of high rice-consuming Hispanic and Asian ethnic groups which
are projected by the U.S. Census Bureau to account for 23% of the U.S.
population by 2020. To a lesser extent, the growth in average per capita
consumption of rice has also been caused by increased awareness of the impact of
diet on health.
31
<PAGE> 36
During the past three years, approximately 50% to 60% of rice produced in
the United States has been consumed domestically. The following table shows
domestic milled rice consumption for the period indicated:
U.S. DOMESTIC MILLED RICE CONSUMPTION
<TABLE>
<CAPTION>
U.S. POUNDS TOTAL U.S.
PER PERSON CONSUMPTION
(Million wt.)
<S> <C> <C>
1982 15.2 34.5
1983 13.6 30.7
1984 14.6 33.1
1985 17.3 40.0
1986 19.9 45.8
1987 20.6 47.5
1988 20.6 49.3
1989 21.3 50.9
1990 22.9 52.9
1991 24.0 54.4
1992 22.8 56.8
1993 23.2 58.3
1994 23.3 60.1
</TABLE>
Rice Production. Over two-thirds of total U.S. rice production is the long
grain variety, which is produced almost entirely within Arkansas, Louisiana,
Mississippi, Texas and Missouri and is marketed worldwide. Medium grain rice,
which is grown in several rice producing states but is the dominant variety
grown in California, accounts for effectively all of the remaining one-third of
all rice grown in the United States. California medium grain, generically known
as Calrose, is preferred within certain segments of the global market, including
Japan, Korea, Turkey, Jordan and Lebanon. The difference between these rice
varieties is primarily reflected in the size and shape of the kernel as well as
amylose or starch content.
The rice growing cycle takes approximately 100 to 125 days from planting
until harvesting, depending on the variety of rice grown. Rice is typically
planted in flooded fields in the early spring and, after it matures, water is
drained from the fields and the crop is harvested. The harvested grain is
referred to as "paddy" or "rough rice." The rough rice is transported to storage
and drying facilities after it is harvested, where the moisture content is
slowly lowered to prepare the rice for milling. After the rice is dried, it is
conveyed to rice mills where it is processed into finished rice products.
The process of milling begins with the cleaning of the rough rice. Once
cleaned, the hull of the rice kernel is removed. The resulting product is known
as brown rice because of the brown color of the bran layer still attached to the
kernel. The hulls are often burned for energy generation and silicone production
or ground and mixed with bran for use as livestock feed. Although brown rice is
sometimes sold directly as a food product, it is usually further processed. The
bran layer is removed in the milling process and broken and imperfect grains are
eliminated, typically using electro-optical scanners. The resulting product is
the white or fancy rice most often seen on grocery store shelves.
Parboiled rice is rough rice that has been soaked, steamed under pressure,
dried and then hulled and milled. The process of parboiling involves soaking the
cleaned rough rice in water and then heating the kernels to specific
temperatures using steam. This process breaks down the starch in the rice and
allows splintered kernels to fuse together to form whole kernels. Once rice has
been parboiled, it changes color and maintains a golden brown hue as contrasted
to regular milled white rice. Parboiled rice retains more nutrients than regular
milled white rice and tends to be more fluffy after cooling.
32
<PAGE> 37
The finished rice products are then ready for packaging and shipping.
Packaging can occur at the rice processing plant or at the destination site
after bulk shipment. Transportation costs associated with bulk shipments are
typically less costly than those of packaged rice.
BRANDS AND MARKETS
The Company is one of the largest competitors in the global market for
rice. In 1994, ARI marketed over 4% of all rice traded worldwide and
approximately 12% of all rice marketed and consumed within the United States.
ARI competes in all major rice importing regions in the world including the
Caribbean, Latin America, Middle East and Asia as well as in domestic regions,
which ARI defines as the United States, Canada and the Bahamas. Over the last
two fiscal years, ARI's domestic and export branded rice has accounted for
approximately 70% of its net sales.
In fiscal 1995, ARI marketed rice in 44 foreign countries with no foreign
country accounting for more than 13% of net sales. The Company plans to continue
to expand into new markets and increase its share in certain of its existing
markets. The following table summarizes the regional concentrations of net sales
during the past three years:
NET SALES BY REGION
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------
<S> <C> <C> <C>
1993(1) 1994(2) 1995
United States and Canada.................... 40% 36% 35%
Middle East................................. 37 33 25
Caribbean, Mexico and South America......... 16 13 23
Asia........................................ -- 14 13
Europe...................................... 3 2 3
Africa...................................... 3 2 1
Other....................................... 1 -- --
--- --- ---
Total.................................. 100% 100% 100%
=== === ===
</TABLE>
---------------
(1) Represents net sales of the Company together with net sales of
Pre-Acquisition ARI for the year ended March 31, 1993, net of
intercompany sales.
(2) Represents net sales of the Company for the year ended March 31,
1994 together with net sales of Pre-Acquisition ARI for the period
from April 1, 1993 to May 26, 1993, net of intercompany sales.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for discussion concerning export sales for ARI and
Pre-Acquisition ARI by geographic region.
The Company's sales to foreign customers are priced in U.S. dollars and
payable, with the exception of a few long standing well established accounts
that are not material, by documentary letters of credit that are confirmed by
major banks before shipments are effected. Consequently, ARI's exposure to
foreign currency fluctuations are not material.
United States and Canada. ARI's domestic sales consist of branded rice
products sold to retail outlets, primarily grocery stores, branded bulk sales to
ethnic wholesale and retail outlets and sales to other industrial users and
major food processors. The United States and Canada together provided 35% and
29% of net sales and gross profits, respectively, in fiscal 1995. ARI has
targeted its domestic marketing programs to achieve regional brand prominence
with such efforts primarily being focused on the top 15 rice consumption
markets. These markets, located principally in New York, California, Texas and
Florida account for over 50% of the rice consumed in the United States. This
focused strategy allows ARI to maximize sales and achieve prominence as a
branded supplier while minimizing selling, general and administrative expenses.
The Company is the second largest seller by tonnage of retail branded long
grain white rice products in the United States with a market share of
approximately 16%. Domestic long grain white rice is the largest
33
<PAGE> 38
retail market category of rice, representing approximately 35% of all retail
rice sales, and is the fastest growing major segment of the U.S. rice market,
having grown 4% in 1994.
ARI's long grain rice brands have attained the number one or number two
market share in many of the regions in which they compete including Comet(R) in
North Carolina, Blue Ribbon(R) in South Carolina, Adolphus(R) in Texas, Comet(R)
in California, Texas and the Southeast and AA(R) in California. The following
table summarizes the Company's brand position in its major markets, which
markets represent approximately 56% of the branded long grain rice consumed in
the United States:
ARI'S U.S. BRAND POSITION BY RETAIL LONG GRAIN RICE MARKET
<TABLE>
<CAPTION>
ARI'S
U.S. MARKET MAJOR BRAND BRAND POSITION
------------------------------------------- -------------- --------------
<S> <C> <C>
Texas...................................... Adolphus(R) #1
New Mexico................................. Comet(R) #1
Oklahoma................................... Comet(R) #1
North Carolina............................. Comet(R) #1
South Carolina............................. Blue Ribbon(R) #1
Virginia................................... Comet(R) #1
Utah....................................... Wonder(R) #1
Ohio....................................... Comet(R) #1
California................................. Comet(R) #2
Florida.................................... Blue Ribbon(R) #2
Georgia.................................... Blue Ribbon(R) #2
</TABLE>
-----------------------
Source: Syndicated Market Data -- 52 weeks ended December 1994.
Certain ethnic groups represent some of the fastest growing segments of the
rice business in the United States. Management believes that AA(R) is the
leading brand of long grain rice among Asian-Americans and dominates sales in
the western region of the United States and certain other regions having large
Asian-American populations. Other ARI brands have strong consumer acceptance
with Hispanic-Americans in the Southwest. ARI's D'Aqui(TM) and Cinta Azul(R)
brands represent approximately 15% of the Puerto Rican retail rice market.
Puerto Rico consumes approximately 6% of the retail rice sold in the United
States and its territories and has a per capita consumption that is more than
four times the United States average.
In addition to its own branded retail products, ARI supplies long grain
white and parboiled rice, instant rice, rice mixes, brown rice and other rice
products to a full range of private label resellers including five of the top
fifteen supermarket chains in the United States and Canada as well as other food
retailers. ARI expanded its production capacity and marketing of rice flour,
bran and instant rice products to customers in the bakery and specialty food
industries in 1992. Management believes that the proportion of specialty product
sales to total sales will increase due to increased awareness by food producers
and consumers of the health benefits of rice.
Middle East. The Middle East accounted for 25% of both net sales and gross
profits in fiscal 1995. Saudi Arabia has been the largest market for U.S. grown
rice, annually importing an average of approximately 700,000 metric tons, and is
currently the largest branded parboiled rice market in the world. ARI's Abu
Bint(R) brand is considered to be one of the best recognized food products in
Saudi Arabia and has accounted for over 60% of all rice imported from the United
States in each of the last 16 years. Overall, Abu Bint(R) is the number one U.S.
brand with a market share of 16% of the total Saudi Arabian market.
Historically, the rice ARI sold in Saudi Arabia was processed and packed in
the United States and shipped to Saudi Arabia. In October 1994, ARI entered into
an agreement with Rice Milling & Trading Investments, Ltd. ("RMT"), an operator
of a receiving, processing, storage and bagging facility in Jeddah, Saudi
Arabia, to receive bulk rice from ARI and pack Abu Bint(R) on an exclusive basis
and under strict ARI quality supervision. By shipping rice in bulk to RMT, ARI
will reduce vessel loading and freight costs. ARI
34
<PAGE> 39
believes that this service agreement with RMT will reduce costs and improve
gross profit and market competitiveness, and will also provide even better
customer service and product freshness. Market shipments under this agreement
began in June 1995. See "Certain Relationships and Related
Transactions -- Transactions with Management."
Rice products exported to Saudi Arabia by ARI are marketed to various
wholesalers and retailers through a number of major distributors. No single
customer accounts for more than 5% of ARI's total net sales and the loss of any
one of these customers would not have a material adverse effect on ARI.
Historically, ARI has had significant sales in Turkey and Iran. Over the
last 24 months, ARI's rice products accounted for 65% of Turkey's rice imports.
Caribbean, Mexico and South America. This region accounted for 23% and 10%
of net sales and gross profit, respectively, in fiscal 1995. The Caribbean is
one of the highest per capita rice consumption markets in the world. ARI sells
branded products such as Comet(R), Blue Ribbon(R), and 4 Star(TM) throughout
this region, with substantial Company-controlled or owned assets in Jamaica,
Haiti and the Netherlands Antilles.
The Company is the largest processor and marketer of rice to Haiti, one of
the eight largest importers of U.S. grown rice, with annual imports averaging in
excess of 120,000 metric tons over the last five years. ARI and Pre-Acquisition
ARI recorded a combined branded market share of approximately 41% and 48% of all
U.S. grown rice imported in 1993 and 1994, respectively.
Within Aruba, Bonaire and Curacao, ARI has a long-term exclusive supply,
processing and marketing agreement with the Antillean Rice Mill, a local
marketing company. ARI ships rice on a cost efficient bulk basis as compared to
other more costly methods of shipment. The Antillean Rice Mill markets ARI's
Blue Ribbon(R) and Comet(R) labels within this region and has sustained a total
market share in excess of 75% in each of the last 10 years.
In Jamaica, ARI's subsidiary, Comet Rice of Jamaica Limited, is the second
largest processor and one of the largest branded retail and food service
marketers in the country.
Asia. Asia accounted for 13% and 31% of net sales and gross profit,
respectively, in fiscal 1995. Japan accounted for virtually all of ARI's sales
to Asia in fiscal 1994 and fiscal 1995. For the twelve-month period ended August
1994, Japan imported 2.4 million metric tons of rice, including approximately
500,000 metric tons from the United States. ARI processed and milled
approximately 62% of the tonnage from the United States. These rice imports, the
first in 25 years by Japan, were necessary due to adverse weather conditions
that materially reduced Japan's 1993 rice crop. Management believes that the
poor rice crop, combined with the fact that Japan's declining rice production
had fallen short of annual Japanese rice consumption for seven of the last 10
harvests, had depleted Japan's rice stock-pile requiring significant rice
imports. Although this was an unusual occurrence, as a participant in GATT,
Japan is contractually obligated to import 379,000 metric tons of rice for the
twelve-month period beginning April 1, 1995 increasing to 758,000 metric tons of
rice annually by the year 2000. Management believes that the Japanese prefer
California grown Calrose variety medium grain rice and that the United States
has an excellent opportunity to obtain more than half of these projected
Japanese imports. Because ARI has previously developed a reputation for high
quality rice and superior service through its prior trade experience with
Japanese importers, management believes it will have material involvement in
these anticipated Japanese imports.
On July 27, 1994, ARI formed ARI-Vinafood, a Vietnamese limited liability
company on a joint venture basis with a company owned by the government of the
Socialist Republic of Vietnam (the "Vietnam Partner") for the purpose of
producing white and parboiled rice and related products at rice processing
facilities in the Can Tho province of Vietnam. ARI owns 55% of ARI-Vinafood and
will be paid a royalty of 3.5% on all export sales from Vietnam by ARI-Vinafood,
which has contracted for export quotas to be issued by the Vietnamese
government. The quotas will allow annual exports of up to 300,000 metric tons of
white rice and 85,000 metric tons of parboiled rice. The term of ARI-Vinafood is
20 years and may be renewed by ARI for an additional 20 years. After the fifth
year of operation, the Vietnam Partner will have the option of acquiring ARI's
interest in ARI-Vinafood based on a valuation of ARI-Vinafood equal to the
greater of (a) eighty percent of ARI-Vinafood's most recent annual sales volume
or (b) twelve times the average pre-
35
<PAGE> 40
tax annual income of ARI-Vinafood over the last two years for which accounting
records are available. ARI-Vinafood began milling and processing operations in
December 1994.
ARI's participation in ARI-Vinafood will allow ARI to participate in the
world market for Asian origin rice. Asian rice varieties are preferred by many
customers in different countries due to a unique taste which is attributed to
different amylose or starch content. In addition, because of Asia's geographic
proximity to such high rice consumption markets as China and Indonesia, ARI's
participation in ARI-Vinafood will give it a freight cost advantage over any
Western or European grown rice in those markets.
PRODUCT SOURCING AND PRICING
The Company's market and source diversity enhances its ability to moderate
the impact of regional trade imbalances caused by climate and geopolitical
factors. ARI is the only marketer of rice in the world with growing sources and
milling capacity in each of the major rice producing regions of the United
States as well as overseas. As a result, the Company utilizes a variety of rice
products grown in the United States and is able to take advantage of regional
cost and supply availabilities. Each of ARI's milling facilities are
strategically located to minimize shipping costs and maximize the convenience to
the customer enabling ARI to capitalize on marketing opportunities as they
develop around the world.
ARI buys rough rice from a variety of farm sources. A large portion of
these rough rice purchases are made under pre-harvest agreements. Pre-harvest
agreements generally provide for delivery of rough rice from specified acreage
at a price per hundredweight determined by the terms of the agreements.
Generally, the price per hundredweight is determined based on local market
conditions occurring between the time of harvest and on or after delivery to the
buyers. For crop year 1993, ARI had pre-harvest agreements to purchase
approximately 5.0 million hundredweight of rough rice in the Southern rice
states and approximately 3.6 million hundredweight from farmers in California,
which represented 37% and 58% of purchases, respectively, for the crop year in
each such region. ARI also obtains domestic rough rice through competitive
bidding in all rice producing states, with California and the Southern rice
states providing approximately 13% and 43%, respectively, of the total rough
rice purchased in crop year 1993. No single supplier of rough rice provides more
than 8% of ARI's rough rice purchases. In addition to purchasing domestic rough
rice, ARI obtains milled rice from other U.S. and foreign rice suppliers on an
as needed basis.
The Chicago Board of Trade maintains a futures and options market in rough
rice. ARI from time to time buys and sells futures and options contracts as a
means to manage a portion of its rough rice requirements. Gains or losses, if
any, are recognized in the period that the market value of the futures contract
changes. Rice futures transactions represent a volume of less than 2% of 1994
combined sales tonnage.
36
<PAGE> 41
The Company sources rice from a variety of locations, including five of the
six significant U.S. rice growing states. The following chart sets forth the
Company's sources of rice shown as a proportion of purchases during fiscal 1995:
SOURCES OF RICE BY REGION
<TABLE>
<S> <C>
California 39%
Texas 23%
Mississippi 13%
Arkansas 11%
Vietnam 10%
Louisiana 4%
</TABLE>
Southern Facilities. ARI operates two rice processing facilities in the
Southern rice growing region of the United States. ARI's Freeport Facility is a
20-acre integrated processing complex with an annual milling capacity of over
600,000 metric tons located directly on a deep water port in the Gulf of Mexico.
The facility is the only rice facility in the United States capable of handling
large ocean-going vessels directly at the facility. The facility has a parboiled
processing plant and separate milling facilities for both white and parboiled
rice. Unlike many rice processing facilities, the Freeport Facility adds water
polishing and electro-optical sorting to ensure that ARI's exacting quality
standards are consistently met. The facility also has a rice flour mill that
markets and meets the stringent quality standards of baby food processors and
Japanese food ingredient purchasers. ARI also processes instant rice for retail
and industrial markets.
During fiscal 1994 and fiscal 1995, ARI invested approximately $1.5 million
to upgrade the Freeport Facility. ARI installed state-of-the-art equipment which
increased the production capacity of the mill by approximately 1.2 million
hundredweight per year and substantially reduced ARI's production cost per
hundredweight.
ARI also operates a rice processing facility in Stuttgart, Arkansas that
has an annual rough rice milling capacity of over 200,000 metric tons. The
Stuttgart Facility is conveniently located in the largest rice producing region
in the United States and provides flexibility in scheduling rice shipments from
the larger Freeport Facility by absorbing capacity overflow. The facility also
generates drying and storage sales and is a delivery point for rice sold on the
Chicago Board of Trade.
California Facilities. ARI operates two rice processing facilities in
Maxwell and Biggs, California and has one of the state's largest single rice
drying operations. The Maxwell Facility is the largest capacity single rice mill
operating in California. The Biggs, California facility (the "Biggs Facility"),
which was leased by Comet in 1991, is an older milling facility which provides
additional milling capacity to supplement ARI's domestic milling requirements.
The combined capacity of the Maxwell Facility and the Biggs Facility exceeds the
multi-mill capacities of ARI's largest California competitors.
37
<PAGE> 42
Other Facilities. ARI also operates packaging facilities in Kingston,
Jamaica and Port-au-Prince, Haiti that receive bulk rice from ARI's Southern
facilities and process and package the bulk rice into local retail branded rice
products. ARI's Haitian facility is located on a self-contained deep water port
25 kilometers outside the capital city and principal market, Port-au-Prince. ARI
recently formed BargeCarib, Inc. to acquire an ocean-going barge to service the
Caribbean area facilities primarily from the Freeport Facility. The barge
acquisition is scheduled to be completed by July 31, 1995. These facilities
provide ARI with competitive advantages in loading, transportation and labor
costs as well as in customer service and product freshness.
COMPETITION
Competition is based upon brand name recognition, quality, product
availability, product innovation and price. On a global basis, management
believes that ARI competes with approximately 14 entities that together trade or
market over 50% of world trade in rice. These competitors are from the United
States and other exporting countries such as Thailand, Pakistan and Vietnam. The
Company's U.S. competitors in the domestic and export milled rice markets
include Riviana Foods Inc., Riceland Foods, Inc., Producers Rice Mills, Inc.,
Continental Grain Company, Cargill Inc. and Farmers Rice Cooperative. There are
other competitors in certain specialized marketing areas, such as Mars, Inc.
(Uncle Ben's), Philip Morris Companies, Inc. (Minute) and the Quaker Oats
Company (Rice-a-Roni) who typically have greater financial and other resources
than the Company and may devote substantially greater resources to increase the
amount of direct competition with the Company. Management estimates that no
single competitor has more than 6.0% global market share while ARI's estimated
share of the global market is 3.8%.
Within the United States, competition exists both for procuring and
processing rough rice, and for marketing milled rice products. Competitors in
the rice milling business include both private commercial mills, such as ARI,
and mills operated by agricultural cooperatives. Management believes that ARI's
principal competitors in milling are Riceland Foods, Inc., Farmers Rice
Cooperative and Cargill Inc. with estimated shares of operating domestic milling
capacity of approximately 19%, 8% and 7%, respectively. ARI's share of estimated
operating domestic milling capacity is approximately 20%.
Domestic competitors of ARI in the marketing of retail branded milled rice
on a national basis principally consist of Riviana Foods Inc. and Riceland
Foods, Inc., and, in the food service markets, Farmers Rice Cooperative.
According to syndicated market data, no company currently controls more than 25%
of the domestic branded markets. There are a number of small regional
competitors in the branded segment of the rice industry and approximately 15 to
20 rice millers who compete in the commodity rice markets.
BRAND NAMES AND TRADEMARKS
Because consumer recognition of branded products adds significant value to
basic commodities such as rice, the Company's trademarks, copyrights and brand
names are important to its business. The trademarks, copyrights and brand names
used by ARI are registered in the countries in which they are used and have
varying renewal dates. ARI believes that such registrations are currently
adequate to protect the rights to use
38
<PAGE> 43
of the trademarks, copyrights and brand names significant to the business of
ARI. The following table summarizes the Company's significant registered U.S.
trademarks and the trademark renewal years:
ARI'S SIGNIFICANT REGISTERED U.S. TRADEMARKS
<TABLE>
<CAPTION>
TRADEMARK RENEWAL YEAR
--------------------------------------------------------- ------------
<S> <C>
AA(R).................................................... 2003
Abu Bint(R).............................................. 2002
Adolphus(R).............................................. 1998
Blue Ribbon(R)........................................... 1995
Cinta Azul(R)............................................ 1997
Colusa Rose(R)........................................... 1999
Comet(R)................................................. 1997
Chopstick(R)............................................. 1999
Dragon(R)................................................ 1999
Golden Sail(R)........................................... 1997
Green Peacock(R)......................................... 2000
Wonder(R)................................................ 2006
</TABLE>
REGULATION
Although ARI is not involved in rice farming, certain government
regulations affecting U.S. rice farmers have an impact on ARI's cost of rough
rice. Approximately 98% of U.S. rice is grown under a U.S.D.A. price support and
acreage control program under the Food, Agriculture, Conservation and Trade Act
of 1990 ("Farm Bill"), which provides price support and production adjustments
for rice producers.
The minimum target price for rice is currently set by the U.S.D.A. at
$10.71 per hundredweight. When the world market price of rice declines below the
minimum target price, rice growers participating in the program are entitled to
receive deficiency payments from the U.S.D.A. To participate in the program,
producers must comply with any acreage reduction program announced by the
Secretary of Agriculture. The amount of acreage controlled or restricted is
reviewed annually by the U.S.D.A. and is determined by projecting ending rice
inventories as a percentage of historical domestic and export usage.
The United States Congress is currently considering legislation to extend,
amend or replace the Farm Bill, which is effective through the crop year ending
July 31, 1996. There can be no assurance that the currently favorable provisions
of such legislation will be extended into future periods or will not be amended
due to budgeting or other governmental constraints. Proposals to significantly
limit or eliminate altogether federal farm price support programs have been
introduced in the United States Congress and if such legislation is enacted,
there could be a significant impact on the supply and price of U.S. grown rice.
Management believes that, should such a change occur, any adverse effect would
be of limited duration because (i) domestic prices would adjust to a point of
economic equilibrium with imports, which would justify adequate production by
U.S. growers using alternate or fallow acreage and employing additional
economies of scale and (ii) any shortage of U.S. grown rice due to termination
of price supports could be offset by imports from other countries using ARI's
cost efficient bulk handling equipment at the Freeport Facility located on a
deep water port and ARI's strategically located packaging facilities.
EMPLOYEES
At March 31, 1995, the Company had 546 employees in domestic operations and
approximately 600 employees in foreign operations. The Company is not a party to
any collective bargaining agreements. There have been no significant labor
disputes in the past several years and the Company considers its employee
relations to be excellent.
39
<PAGE> 44
PROPERTIES
The following table summarizes the principal properties owned and/or
occupied by the Company and its subsidiaries:
<TABLE>
<CAPTION>
FLOOR SPACE OWNED OR LEASED -
LOCATION TYPE OF FACILITY SQUARE FOOTAGE EXPIRATION DATE OF LEASE
-------------------------------------------- ---------------- -------------- ------------------------
<S> <C> <C> <C>
ADMINISTRATIVE OFFICES:
Houston, Texas............................ Office 46,400 Leased 1997
Los Angeles, California................... Office 4,000 Leased 1996
WAREHOUSING, PROCESSING AND SHIPPING:
Freeport, Texas........................... Plant/Warehouse 272,400 Leased 2022
Stuttgart, Arkansas....................... Plant/Warehouse 142,900 Owned
Maxwell, California(1).................... Plant/Warehouse 261,000 Owned and Leased 2034
Biggs, California......................... Plant/Warehouse 95,000 Leased 1996
Laffiteau, Haiti.......................... Plant/Warehouse 30,024 Leased 2001
Spanish Town, Jamaica..................... Plant/Warehouse 29,000 Leased 1998
Can Tho, Vietnam(2)....................... Plant/Warehouse 1,300,000 Leased 2014
</TABLE>
---------------
(1) Most of the storage facilities and approximately half of the land is leased.
(2) Subject to an option to purchase by the Vietnam Partner commencing 1999.
All properties owned or leased by the Company are maintained in good
repair, and management believes them to be adequate for their respective
purposes. All machinery and equipment are considered to be in sound and
efficient operating condition.
The Company has obtained appraisals dated as of May 31, 1995 and June 1,
1995, from American Appraisal Associates, Inc. and Jack K. Mann, Inc.,
respectively, of the Freeport Facility and the Maxwell Facility, respectively.
The Freeport Facility and the Maxwell Facility were appraised, together with the
Company's registered U.S. trademarks used by each facility, on a going concern
basis, at approximately $91.0 million and $45.0 million, respectively.
ENVIRONMENTAL MATTERS
ARI is subject to various federal, state and local environmental laws and
regulations governing, among other things, air quality, water quality and the
generation, use and disposal of materials related to plant operations and the
processing, storage and shipment of rice. ARI believes it is in substantial
compliance with all existing laws and regulations and has obtained or applied
for the necessary permits to conduct its business and is in substantial
compliance with all existing laws and regulations with respect to those of its
properties held for sale. To date, and in management's belief for the
foreseeable future, compliance with applicable environmental laws has not had
and will not have a material adverse effect on ARI's financial or competitive
positions. See "Risk Factors -- Environmental Matters."
LEGAL PROCEEDINGS
The Company is involved in legal proceedings that arise in the ordinary
course of its business, all of which are routine in nature except for the matter
noted below. Management believes that the resolution of such legal proceedings,
including the matter noted below, will not have a material adverse effect on the
consolidated financial position or consolidated results of operations of ARI.
The U.S.D.A. has conducted a series of investigations of several companies,
including Comet, concerning alleged abuses of federal regulations governing U.S.
government guarantees of payments on shipments of agricultural products to Iraq.
The current investigation, which began in February 1994, is continuing as a
joint investigation with the Department of Justice. In connection with its sales
of rice to Iraq prior to the August 1990 embargo, Comet is alleged to have
failed to adequately apprise the U.S.D.A. that Comet included foreign bagging of
rice as a contract cost in certain financing guaranteed by the U.S. government.
A regulation specifying that foreign bagging may not be included as a financed
contract cost in such financing
40
<PAGE> 45
was not passed until June 1991, a year after Comet's last shipment to Iraq. The
Company is cooperating with the investigation; there have been no civil
enforcement actions and no indictments or charges filed against ARI or any of
its affiliates or agents concerning such allegations. Management does not
believe that any laws were violated or that ARI or any of its affiliates or
agents will be subject to liability.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information with respect to each of the
executive officers and directors of ARI:
<TABLE>
<CAPTION>
YEARS OF
NAME AGE SERVICE(1) POSITIONS HELD
------------------------------ --- ---------- -------------------------------------------
<S> <C> <C> <C>
EXECUTIVE OFFICERS:
Gerald D. Murphy............ 67 31 Chairman of the Board of Directors
Douglas A. Murphy........... 39 13 President, Chief Executive Officer and
Director
Richard N. McCombs.......... 49 11 Executive Vice President of Finance and
Administration; Treasurer, Secretary and
Director
Lee Adams................... 54 28 Senior Vice President of International
Marketing
Bill J. McFarland........... 58 20 Senior Vice President and President of
Comet American Marketing Division
John S. Poole............... 49 25 Senior Vice President and President of
Comet Rice Division
C. Bronson Schultz.......... 53 21 Vice President of Finance and Data
Processing
Joseph E. Westover.......... 50 18 Vice President and Controller
DIRECTORS:
Gerald D. Murphy............ 67 31 Chairman of the Board of Directors
Douglas A. Murphy........... 39 13 President, Chief Executive Officer and
Director
Richard N. McCombs.......... 49 11 Executive Vice President of Finance and
Administration; Treasurer, Secretary and
Director
S.C. Bain, Jr. ............. 46 7 Director
William H. Burgess.......... 78 19 Director
John M. Howland............. 47 12 Director
George E. Prchal............ 52 13 Director
</TABLE>
---------------
(1) Years with ARI, including past and currently affiliated companies.
Gerald D. Murphy has served as Chairman of the Board of the Company since
October 1993 and as a director since 1988. He served as Chairman and Chief
Executive Officer of Comet from 1986 until the Acquisition in 1993 and has
served as President, Chief Executive Officer and Chairman of the Board of ERLY
since 1964. He also serves as a director of Pinkerton's, Inc., a security and
investigation services firm, and High Resolution Sciences, Inc., a technological
corporation. He previously served as a director of Wynn's International, Inc.
and Sizzler Restaurants International, Inc. Gerald D. Murphy is the father of
Douglas A. Murphy.
Douglas A. Murphy has served as President and Chief Executive Officer of
the Company since June 1993 and as a director since 1990. He was President of
Comet American Marketing, now a division of ARI, from 1986 to 1990 and has
served in various other capacities with Comet since 1982. He has served as
President and as a director of ERLY since 1990. He is also a director advisor of
Compass Bank Houston.
Richard N. McCombs has served as Executive Vice President of Finance and
Administration; Treasurer, Secretary and a director of the Company since 1993.
In addition, he has served as Managing Director of the
41
<PAGE> 46
ARI-Vinafood joint venture since September 1994 and as Vice President and Chief
Financial Officer of ERLY since 1990.
Lee Adams has served as Senior Vice President of International Marketing of
ARI since June 1993. In addition, he served as Group Vice President of
International Marketing of Pre-Acquisition ARI from October 1987 to June 1993.
He served in various capacities with the ARI Cooperative from 1975 until its
dissolution in 1991 and in various capacities with Comet from 1963 until 1972.
Bill J. McFarland has served as Senior Vice President of ARI and President
of the Comet American Marketing division of ARI since 1993. Mr. McFarland has
served as a director of ERLY since 1986 and Vice President of ERLY since 1976.
He served as President of ERLY Food Group from 1990 to 1993 and as President of
Early California Foods Inc., a division of ERLY, and in various other capacities
with ERLY from 1972 to 1990.
John S. Poole has served as Senior Vice President and President of the
Comet Rice division of ARI since June 1993 and served as President of Comet from
August 1990 until its liquidation after the Acquisition. He served in various
capacities with Comet from 1970 to 1990.
C. Bronson Schultz has served as Vice President of Finance and Data
Processing of ARI since January 1994. He served as Vice President and Chief
Financial Officer of ERLY Juice Inc. from 1988 through 1993, as Vice President
of Finance of Comet from 1974 to 1986 and as Vice President of Finance of Comet
American Marketing from 1986 to 1988.
Joseph E. Westover has served as Vice President and Controller of ARI since
January 1994. From 1983 through 1993, he served as Assistant Vice President of
Finance with ARI and the ARI Cooperative and from 1977 to 1983 in various
positions with the ARI Cooperative.
S.C. Bain, Jr. has served as a director of ARI since 1987. He has served as
President of Bain, Inc., a farming corporation, since 1985 and has been a
partner at Bain Farms since April 1988.
William H. Burgess has been a director of ARI since 1988 and a director of
ERLY since 1976. In addition, he has been a private business consultant and the
Chairman of CMS Digital, Inc., a privately held company since 1986. From 1978 to
1986 Mr. Burgess was Chairman of International Controls Corp., an
internationally diversified manufacturing company.
John M. Howland has served as a director of ARI since June 1993 and a
consultant to ARI since October 1993. He served as Chairman of the Board of
Directors from June 1993 until October 1993 when he resigned to become President
and Chief Executive Officer of Rice Milling & Trading Investments, Ltd., a
foreign corporation in the business of rice trading and processing. He served as
Chairman of the Board and the Chief Executive Officer and President of
Pre-Acquisition ARI from its inception in 1988 until June 1993 and served in
various capacities with the ARI Cooperative from 1983 until its dissolution in
1991.
George E. Prchal has served as a director of ARI since June 1993 and a
consultant to ARI since October 1993 and is presently the Executive Vice
President of Rice Milling & Trading Investments, Ltd. He served as Executive
Vice President of ARI from August 1988 to October 1993 and in various capacities
with the ARI Cooperative from February 1986 until its dissolution in 1991. From
July 1982 to February 1986 he served as Vice President of Marketing and Sales
and then as President of Comet.
42
<PAGE> 47
EXECUTIVE COMPENSATION
The following table sets forth information for the years ended March 31,
1993 to 1995, for the Chief Executive Officer of ARI and the four other most
highly compensated executive officers of the Company:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
--------------------------------------------------------
ALL
OTHER RESTRICTED OTHER
YEAR ENDED COMPEN- STOCK COMPEN-
NAME AND PRINCIPAL POSITION MARCH 31, SALARY BONUS(2) SATION(3) AWARDS(4) SATION(5)
------------------------------- ---------- -------- ------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Douglas A. Murphy.............. 1995 $207,000 $69,552 $5,791 $ 17,890 $ 8,914
President, Chief Executive 1994 173,654 50,000 2,000 75,000 15,855
Officer and Director 1993(6) -- -- -- -- --
Gerald D. Murphy............... 1995 $170,500 $57,288 $7,233 $ 14,736 $ 9,060
Chairman of the Board 1994 179,167 50,000 -- 75,000 196,645
of Directors 1993 280,000 -- 3,284 -- 5,627
Bill J. McFarland.............. 1995 $198,000 $55,400 $4,075 $ 14,263 $ 7,500
Senior Vice President 1994 135,192 5,000 -- 5,000 --
President, CAM Division 1993(6) -- -- -- -- --
John S. Poole.................. 1995 $165,000 $46,200 $6,509 $ 11,886 $ 7,500
Senior Vice President 1994 155,000 15,000 1,736 15,000 12,034
President, Comet Rice
Division 1993 155,000 8,000 4,940 12,750 2,700
Lee Adams...................... 1995 $160,000 $44,800 $9,100 $ 11,524 $ 6,017
Senior Vice President 1994 155,000 5,000 6,390 5,000 8,633
International Marketing 1993 150,000 -- 4,702 -- 11,699
</TABLE>
---------------
(1) Amounts earned for services performed for ERLY and its other subsidiaries,
not included in the table above, are as follows:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------------------------------
ALL
OTHER RESTRICTED OTHER
YEAR ENDED COMPEN- STOCK COMPEN-
NAME MARCH 31, SALARY BONUS SATION(3) AWARDS(4) SATION(5)
------------------------------- ---------- -------- ------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Douglas A. Murphy.............. 1995 $ 23,000 $23,728 $ -- $ 18,968 $ --
1994 36,346 -- 2,975 -- 100,000
1993 195,000 -- 3,675 -- 5,216
Gerald D. Murphy............... 1995 $139,500 $62,872 $ -- $ 29,038 $ --
1994 110,833 -- 588 -- 100,000
1993 -- -- -- -- --
Bill J. McFarland.............. 1995 $ -- $ -- $ -- $ -- $ --
1994 54,808 -- 1,815 -- 11,743
1993 185,000 -- 1,650 -- 3,700
</TABLE>
(2) In fiscal 1995 bonuses were paid to certain officers of the Company under an
incentive compensation plan based, subject to approval by the shareholders,
on the Return on Equity (as defined in such plan) earned annually by the
Company. Such bonuses are payable 80% in cash and 20% in common stock of
ERLY over a two-year period subject to continuing performance requirements.
See " -- Incentive Compensation Plan."
(3) Amounts included in this column reflect: (i) the cost of company provided
automobiles relating to personal use, and (ii) reimbursements under the
Executive Medical Plan. Under this Plan, key executive officers are
reimbursed for expenses incurred by them and their dependents for medical
and dental care not covered by other sources.
43
<PAGE> 48
(4) Amounts include awards of restricted ERLY common stock. The number of shares
of this stock held and market value at March 31, 1995, were as follows:
<TABLE>
<CAPTION>
NAME SHARES MARKET VALUE
------------------------------------- ------ ------------
<S> <C> <C>
Douglas A. Murphy.................... 20,379 $229,264
Gerald D. Murphy..................... 20,990 236,137
Bill J. McFarland.................... 2,402 27,022
John S. Poole........................ 8,470 95,287
Lee Adams............................ 2,160 24,300
</TABLE>
Such shares are restricted for a two-year period from date of issuance.
(5) Substantially all employees are covered by the ERLY Employees Profit Sharing
Retirement Plan, a defined contribution plan. ARI and ERLY make a mandatory
1% matching contribution to the plan on a monthly basis and an annual
contribution at the discretion of their respective Boards of Directors. The
basis for contributions for executive officers is the same as for other
employees. Amounts listed include company contributions under this plan. In
1994, Douglas A. Murphy and Gerald D. Murphy were each paid a fee of
$100,000 for their personal guarantees of $5 million of bank debt under an
agreement between ING Capital, ERLY and ERLY Juice Inc. In 1994, Gerald D.
Murphy was also paid a fee of $180,000 for a personal guarantee of an $8
million bank line of credit to Comet.
(6) Noted individuals were not paid by ARI or Comet in 1993.
The following table presents information on ERLY common stock options held
by the executive officers named in the Summary Compensation Table at the end of
fiscal 1995. During fiscal 1995, Mr. McFarland exercised options granted in 1985
for the purchase of 8,053 shares of ERLY common stock at a price of $3.73 per
share. No other officers exercised any stock options during the year.
AGGREGATED OPTION/SAR EXERCISES IN FISCAL 1995
AND MARCH 31, 1995 OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
SHARES AT MARCH 31, 1995 AT MARCH 31, 1995(2)
ACQUIRED ON VALUE ----------------------------- -----------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------------------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Douglas A. Murphy...... -- -- 66,550 -- $ 448,547 --
Gerald D. Murphy....... -- -- -- -- -- --
Bill J. McFarland...... 8,053 $60,559 26,620 -- 179,419 --
John S. Poole.......... -- -- 16,638 -- 112,140 --
Lee Adams.............. -- -- -- -- -- --
</TABLE>
---------------
(1) Market value of underlying ERLY securities at the exercise date ($11.25),
less the exercise price ($3.73).
(2) Market value of underlying ERLY securities at March 31, 1995 ($11.25), less
the exercise price ($4.51).
EMPLOYMENT AGREEMENT
In connection with the ARI Cooperative's reorganization as Pre-Acquisition
ARI, Pre-Acquisition ARI entered into several employment agreements with certain
Pre-Acquisition ARI employees. Lee Adams' employment agreement provides that, as
an employee, he shall be entitled to certain benefits for a five-year term
commencing (i) on the date of termination, if termination is by notice of ARI
and there has been no Change of Control (as defined in such employment
agreement), (ii) on the occurrence of a Benefits Event (as defined in such
employment agreement) following a Change of Control, if termination is at the
option of the employee, or (iii) on the occurrence of the last Change of Control
preceding the date of termination, if termination is by notice of ARI. Under the
terms of the employment agreement, such benefits are provided unless termination
is both, at the option of the employee and in the absence of a Change of
Control. A Change of Control is deemed to occur if any person becomes beneficial
owner of 25% or more of the voting power of ARI or during any consecutive years,
the individuals comprising a majority of the Board of Directors at the beginning
of such period shall cease to constitute a majority. Generally, benefits payable
under the employment agreement include continuation of the employee's base
salary, continuation of the employee's participation in profit sharing, pension
and other executive compensation plans and various health care and
44
<PAGE> 49
disability plans, the right to a cash bonus in the amount of the bonus last
received if ARI awards a cash bonus to any member of the Executive Group (as
defined in such employment agreement) during such five-year period, and
indemnification for judgments, fines and expenses incurred by the employee by
reason of his serving as an officer. In consideration of these benefits, Mr.
Adams has agreed not to compete with ARI or to disclose any confidential
information of ARI during the five-year period during which he is to receive
such benefits. If ARI or its successor fails to make timely payments as required
by the employment agreement, liquidated damages are set at treble the amount of
such untimely payments. Certain amounts that may be paid under the employment
agreement upon Mr. Adams' termination may be deemed to be "excess parachute
payments" within the meaning of Section 280G of the Internal Revenue Code and,
as such, would not be deductible by ARI for federal income tax purposes.
COMPENSATION OF DIRECTORS
Directors who are not executive officers of the Company are paid $2,000 per
quarter plus $1,000 for each board meeting attended.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Decisions on the compensation of the Company's executive officers are made
by the Compensation Committee of the Board of Directors. The Compensation
Committee consists of Gerald D. Murphy, who acts as chairman of the committee,
William H. Burgess and S.C. Bain, Jr. Mr. Murphy is Chairman of the Board of the
Company and is the direct and indirect record and beneficial owner of 37.4% of
ERLY common stock. Mr. Burgess is a private business consultant, Chairman of CMS
Digital, Inc. and a director of ERLY. He is the beneficial owner of 7.6% of ERLY
common stock.
All decisions by the Compensation Committee were reviewed and approved
without change by the full Board of Directors of the Company. Mr. Murphy did not
participate in any Compensation Committee or Board of Directors discussions or
decisions concerning his own compensation. Except for Mr. Murphy, no other
member of the Compensation Committee is now or ever has been an officer or
employee of the Company or its subsidiaries.
Mr. Murphy and Mr. Burgess are also directors of ERLY. Both serve on ERLY's
Compensation Committee of the Board of Directors, with Mr. Burgess serving as
chairman. Mr. Bain is President of Bain, Inc. and a partner at Bain Farms.
INCENTIVE COMPENSATION PLAN
In fiscal 1995, ARI's Board of Directors adopted, subject to shareholder
approval, an Incentive Compensation Plan (the "Incentive Plan"), pursuant to
which certain key officers of the Company are entitled to receive bonuses, in
addition to other compensation they may receive from the Company, of 80% cash
and 20% ERLY common stock if Return on Equity (as defined therein) of ARI are
achieved. Bonuses under the Incentive Plan are 70% earned in the year the Return
on Equity is 15% or greater and the remaining 30% will be earned in the
following fiscal year if the Company achieves a Return on Equity of 15% or
greater in such subsequent fiscal year. Unvested bonuses awarded that would
otherwise be available under the Incentive Plan in the subsequent fiscal year
will be forfeited upon a participant's voluntary termination of employment.
Furthermore, no shares of stock issued under the Incentive Plan can be
transferred for two years following issuance. The Incentive Plan is not subject
to any provisions of ERISA.
45
<PAGE> 50
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the share ownership of the Company's Common
Stock (as defined), the Series A Preferred Stock (as defined), and the Series B
Preferred Stock at March 31, 1995 (i) owned by ERLY, the only person or entity
known to own more than 5% of the outstanding voting shares of any of the voting
capital stock of the Company; (ii) each director of the Company; (iii) each
executive officer named in the Summary Compensation Table; (iv) all directors
and executive officers of the Company and its subsidiaries as a group; and (v)
all other owners of 5% or more of ERLY common stock. Except as indicated, each
of the stockholders has sole voting power and investment power with respect to
the shares beneficially owned by such stockholder.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER TITLE OF CLASS BENEFICIAL OWNERSHIP PERCENT OF CLASS
------------------------------------------------- -------------------------- -------------------- ----------------
<S> <C> <C> <C>
ERLY Industries Inc.............................. Common Stock 777,777(7) 32%
10990 Wilshire Blvd. Series A Preferred Stock 777,777(7) 100
Los Angeles, CA 90024 Series B Preferred Stock 2,800,000(7)(8) 100
Gerald D. Murphy(1).............................. Common Stock 777,777(7) 32%
10990 Wilshire Blvd. Series A Preferred Stock 777,777(7) 100
Los Angeles, CA 90024 Series B Preferred Stock 2,800,000(7)(8) 100
Douglas A. Murphy(2)............................. Common Stock 777,777(7) 32%
10990 Wilshire Blvd. Series A Preferred Stock 777,777(7) 100
Los Angeles, CA 90024 Series B Preferred Stock 2,800,000(7)(8) 100
William H. Burgess(3)............................ Common Stock 777,777(7) 32%
550 Palisades Drive Series A Preferred Stock 777,777(7) 100
Palm Springs, CA 92262 Series B Preferred Stock 2,800,000(7)(8) 100
State Treasurer of the State of Michigan(4)...... Common Stock 777,777(7) 32%
301 W. Allegan Street Series A Preferred Stock 777,777(7) 100
Lansing, MI 48922 Series B Preferred Stock 2,800,000(7)(8) 100
Gentleness(5).................................... Common Stock 777,777(7) 32%
P.O. Box N7776 Series A Preferred Stock 777,777(7) 100
Lyford Cay Series B Preferred Stock 2,800,000(7)(8) 100
Nassau, Bahamas
Internationale Nederlanden (U.S.) Capital
Corporation(6)................................. Common Stock 777,777(7) 32%
135 E. 57th Street Series A Preferred Stock 777,777(7) 100
New York, NY 10022-2101 Series B Preferred Stock 2,800,000(7)(8) 100
S.C. Bain, Jr.................................... Common Stock * *
P.O. Box 250
Bunkie, LA 71322
John M. Howland.................................. -- -- --
16825 Northchase Drive
Suite 1600
Houston, TX 77060
Richard N. McCombs............................... -- -- --
16825 Northchase Drive
Suite 1600
Houston, TX 77060
---------------
(Footnotes on following page)
</TABLE>
46
<PAGE> 51
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER TITLE OF CLASS BENEFICIAL OWNERSHIP PERCENT OF CLASS
------------------------------------------------- -------------------------- -------------------- ----------------
<S> <C> <C> <C>
George E. Prchal................................. -- -- --
16825 Northchase Drive
Suite 1600
Houston, TX 77060
Lee Adams........................................ Common Stock * *
16825 Northchase Drive
Suite 1600
Houston, TX 77060
Bill J. McFarland................................ -- -- --
16825 Northchase Drive
Suite 1600
Houston, TX 77060
John S. Poole.................................... -- -- --
16825 Northchase Drive
Suite 1600
Houston, TX 77060
All directors and executive officers as
a group (12 persons)........................... Common Stock 782,290 32%
</TABLE>
---------------
* Less than one percent.
(1) Gerald D. Murphy, Chairman of the Board of ERLY, is the direct and indirect
record and beneficial owner of 1,517,191 shares of ERLY common stock,
representing approximately 37.4% of the outstanding shares of ERLY common
stock.
(2) Douglas A. Murphy, President and a director of ERLY, is the beneficial owner
of 506,502 shares of ERLY common stock, representing approximately 12.5% of
the outstanding shares of ERLY common stock.
(3) William H. Burgess, a director of ERLY, beneficially owns 283,000 shares of
ERLY common stock, representing approximately 7.6% of the outstanding shares
of ERLY common stock.
(4) The State of Michigan Retirement System beneficially owns 372,368 shares of
ERLY common stock, representing approximately 10.0% of the outstanding
shares of ERLY common stock.
(5) Gentleness beneficially owns 220,000 shares of ERLY common stock,
representing 5.9% of the outstanding shares of ERLY common stock.
(6) Internationale Nederlanden (U.S.) Capital Corporation owns warrants to
purchase approximately 725,000 shares of ERLY common stock, representing 15%
of ERLY common stock on a fully diluted basis.
(7) ERLY has sole voting and dispositive power over such shares.
(8) ERLY has pledged 2,600,000 of these shares to secure the payment of ARI's
term debt, which is to be repaid with a portion of the proceeds of this
Offering. 200,000 of these shares are pledged to former lenders of ARI to
secure the obligation of ERLY on promissory notes aggregating $3.0 million
incurred in connection with financing the Acquisition. The Series B
Preferred Stock has two votes per share and is convertible into Common Stock
on the same basis.
47
<PAGE> 52
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT
In October 1994, ARI entered into an agreement with Rice Milling & Trading
Investments, Ltd. ("RMT"), a company which operates a receiving, processing,
storage and bagging facility in Saudi Arabia to receive and pack ARI products on
an exclusive basis and under ARI supervision. Market shipments under this
agreement began in June 1995 and, although no payments have yet been made to
RMT, management expects that RMT annually will receive, process, store and bag
rice shipped by ARI valued in excess of $20 million, of which RMT will retain in
excess of $1 million as compensation for its services. Two directors of ARI,
John M. Howland and George E. Prchal, are executive officers of RMT and are
consultants to ARI. During fiscal 1995 the Company paid $100,000 to each of Mr.
Howland and Mr. Prchal for consulting services. The terms of the agreement with
RMT were determined by arms-length negotiations between the Company and RMT.
S.C. Bain, Jr., a director of ARI, sells rough rice to ARI under grower
agreements which contain the same terms or options as ARI's agreements with
other growers. The amount of rice provided by Mr. Bain has not, during any of
the last years, exceeded one percent of the total volume of rough rice purchased
by ARI.
TRANSACTIONS WITH AFFILIATES
As a result of the Acquisition, ERLY increased its ownership in the
combined voting rights of ARI stock outstanding from 48% to 81%. Because of
their positions as directors and significant stockholders of ERLY, Gerald D.
Murphy, Douglas A. Murphy, and William H. Burgess can be deemed to be the
beneficial owners of the ARI stock owned by ERLY. Additionally, Gerald D.
Murphy, Douglas A. Murphy and William H. Burgess also serve as directors of ARI.
Gerald D. Murphy is Chairman of the Board of ARI and Douglas A. Murphy is the
President and Chief Executive Officer of ARI.
In connection with the Acquisition, the intercompany payables and
receivables were netted and resulted in an obligation owed to ARI by ERLY that
is reflected in the 6% ERLY Intercompany Note. The 6% ERLY Intercompany Note
will be amended on or before the Closing Date to provide that it will mature one
day after the Maturity Date (as defined), will have a principal amount of $10.0
million and will be payable out of half of any dividends received on the Series
B Preferred Stock until the 15% ERLY Intercompany Note is paid in full, at which
time the 6% ERLY Intercompany Note will be payable by offsets against Tax
Sharing Payments and half of any dividends received on the Series B Preferred
Stock. This note bears interest at the rate of 6% per annum and the balance due
pursuant to the 6% ERLY Intercompany Note was approximately $11.9 million at
March 31, 1995.
ARI files a consolidated federal income tax return with ERLY. ARI and ERLY
entered into a Tax Sharing Agreement on May 25, 1993, which will be amended on
or before the Closing Date (as amended, the "Tax Sharing Agreement") and
pursuant to which ARI will pay to or receive from ERLY the amount of income
taxes currently payable or refundable computed as if ARI filed its annual tax
return as a separate company. ARI intends to pay approximately $1.0 million to
ERLY in satisfaction of ARI's current obligation under the Tax Sharing Agreement
on or before the Closing Date. All payments owed by ARI under the Tax Sharing
Agreement shall be offset against ERLY's principal and interest payment
obligations under the 15% ERLY Intercompany Note. See "Use of Proceeds."
ARI entered into a Management Agreement with ERLY on May 25, 1993, which
will be amended on or before the Closing Date, pursuant to which ERLY provides
to ARI certain marketing, operating and management services, including global
business planning, new product supply development, new market development
services and assistance in insurance, human resources, finance and employee
benefits. Other than Gerald D. Murphy, none of the employees, officers or
directors of ERLY rendering such services are officers or directors of ARI. Mr.
Murphy provides services under this Management Agreement to ARI for which ERLY
is compensated. In exchange for such services, ARI pays ERLY a monthly
management fee of $80,000. Payment of the management fees will be permitted
under the Indenture only if the Company has paid all payments of principal,
premium, if any, and interest due on the Mortgage Notes at the time payment of
such fees is made and ARI has Consolidated Cash Flow in excess of $19.0 million
for the four fiscal
48
<PAGE> 53
quarters last completed prior to such payment. Any management fees not paid will
be deferred until such time as the described events prohibiting payment no
longer exist. The term of the Management Agreement is two years with an
automatic two-year renewal unless one party notifies the other that it wishes to
terminate the Management Agreement. During fiscal 1995 and fiscal 1994, ARI paid
ERLY $0.9 million and $1.1 million, respectively, in management fees pursuant to
the Management Agreement. During fiscal 1993, fiscal 1992 and fiscal 1991, Comet
paid ERLY management fees of $2.1 million, $1.9 million and $1.9 million,
respectively.
The Company will lend ERLY $10.5 million in exchange for the 15% ERLY
Intercompany Note, maturing one year and one day prior to the Maturity Date, the
proceeds of which will be applied by ERLY on the Closing Date in satisfaction of
$9.6 million of indebtedness owed by ERLY Juice Inc. and guaranteed by ERLY to
ING Capital and to facilitate the repurchase of ERLY common stock warrants held
by ING Capital. Currently, ING Capital beneficially owns warrants to acquire 15%
of the outstanding voting capital stock of ERLY (on a common stock equivalent
basis). In addition, ING Capital is a participant in the Term Loan and, in
connection with the repayment of the Term Loan, ING Capital will receive
approximately $23.8 million. See "Use of Proceeds."
DESCRIPTION OF CAPITAL STOCK
Under ARI's Articles of Incorporation, as amended through September 9, 1994
(the "Articles of Incorporation"), ARI has the authority to issue 14,000,000
shares divided into the following: 10,000,000 shares of Common Stock, par value
$1.00 per share (the "Common Stock"), 4,000,000 shares of preferred stock, par
value $1.00 per share, of which 777,777 shares were designated as Series A
Preferred Stock (the "Series A Preferred Stock"); 2,800,000 shares were
designated as Series B Preferred Stock (the "Series B Preferred Stock"); and
300,000 shares were designated as Series C Preferred Stock (the "Series C
Preferred Stock," and collectively with the Series A Preferred Stock and the
Series B Preferred Stock, the "Preferred Stock"). At March 31, 1995, the Company
had 2,443,892 shares of Common Stock, 777,777 shares of Series A Preferred
Stock, 2,800,000 shares of Series B Preferred Stock and 300,000 shares of Series
C Preferred Stock issued and outstanding. The Revolving Credit Loan and the
Indenture restrict the payment of any dividends on the capital stock of ARI.
COMMON STOCK
ERLY owns 777,777 shares of ARI's Common Stock, representing 32% of ARI's
total issued and outstanding Common Stock and 9% of the total voting shares.
Holders of Common Stock are entitled to one vote per share on all matters
to be voted on by stockholders and are entitled to one vote per share on all
matters to be voted on by stockholders and are entitled, subject to any
preferential rights of holders of Preferred Stock, to receive dividends, if any,
as may be declared from time to time by the Board of Directors of ARI. Upon any
liquidation or dissolution of ARI, the holders of Common Stock are entitled,
subject to any preferential rights of holders of Preferred Stock, to receive a
pro rata share of all the assets remaining available for distribution to
stockholders after payment of all liabilities.
The Common Stock is traded on the Nasdaq Small Capitalization Market under
the symbol "RICE." The transfer agent and registrar for the Common Stock is
Society National Bank.
SERIES A PREFERRED STOCK
ERLY owns 777,777 shares, or 100%, of the issued and outstanding Series A
Preferred Stock, representing 9% of the total voting shares.
Each share of Series A Preferred Stock is convertible into one share of
Common Stock at the election of the holder of such share.
The Series A Preferred Stock has no rights of redemption or sinking fund
provisions, but upon any liquidation of ARI, the holders of Series A Preferred
Stock must be paid $25.70 per share, for a total of $19,989,000, before any
amounts may be paid to the holders of the Series B Preferred Stock, the Series C
49
<PAGE> 54
Preferred Stock or the Common Stock. The holders of Series A Preferred Stock are
entitled to one vote per share on all matters upon which the holders of Common
Stock have the right to vote and are generally entitled to vote as a class on
only matters adversely affecting their rights as holders of Series A Preferred
Stock.
Holders of shares of Series A Preferred Stock are entitled to receive
dividends, when and if declared by the Board of Directors of ARI, on the same
terms and in the same amounts as dividends payable to holders of the Common
Stock.
SERIES B PREFERRED STOCK
ERLY owns 2,800,000 shares, or 100%, of the issued and outstanding Series B
Preferred Stock, representing 63% of the total voting shares.
Each share of Series B Preferred Stock is convertible into two shares of
Common Stock at the election of the holder of such share. ERLY has pledged
2,600,000 shares of Series B Preferred Stock to ARI's current lenders and
200,000 shares of Series B Preferred Stock is pledged to certain of ARI's former
lenders. Pursuant to the two agreements pledging all 2,800,000 shares of Series
B Preferred Stock, ERLY may exercise its conversion rights only with the consent
of the secured party. The Series B Preferred Stock provides for annual,
cumulative, non-participating dividends of approximately $5.2 million. No
dividends have been declared or paid as of March 31, 1995, at which date the
accumulated, undeclared dividends totaled $9.5 million.
The Series B Preferred Stock has no rights of redemption or sinking fund
provisions, but upon any liquidation of ARI, ARI must pay the holders of Series
B Preferred Stock $5.00 per share, for a total of $14,000,000, pari passu with
any liquidation payments made in respect of the Series C Preferred Stock before
any amounts may be paid to the holders of the Common Stock. Each share of Series
B Preferred Stock provides for annual cumulative, non-participating dividends of
$1.85, the first $0.27 of which is to be paid at the same time as and pari passu
with dividends declared and paid on the Series C Preferred Stock. The holders of
Series B Preferred Stock are entitled to two votes per share on all matters upon
which the holders of Common Stock have the right to vote and are entitled to
vote as a class only on any matters adversely affecting their rights as holders
of Series B Preferred Stock.
SERIES C PREFERRED STOCK
The Series C Preferred Stock was issued to certain former lenders of ARI in
connection with the Acquisition in partial satisfaction of certain indebtedness
owed to them. In the aggregate, these former lenders own 300,000 shares, or
100%, of the Series C Preferred Stock.
The Series C Preferred Stock has no rights of redemption or sinking fund
provisions, but upon any liquidation of ARI, ARI must pay the holders of Series
C Preferred Stock $5.00 per share, for a total amount of $1,500,000, pari passu
with any liquidation payments made in respect of the Series B Preferred Stock
before any amounts may be paid to the holders of Common Stock. The Series C
Preferred Stock provides for annual cumulative, non-participating dividends of
$2.50 per share, or $750,000 in total, is non-convertible and non-voting.
Further, the Series C Preferred Stock is callable by ARI at any time at a price
of $26.35 per share less aggregate dividend payments per share. No dividends
have been declared or paid as of March 31, 1995, at which date the accumulated,
undeclared dividends totaled $1.4 million.
The Articles of Incorporation provide that, so long as any shares of Series
B Preferred Stock or Series C Preferred Stock are outstanding, ARI will not,
with respect to the Series B Preferred Stock and the Series C Preferred Stock,
alter the Articles of Incorporation so as to adversely affect the rights of such
stock, authorize or create any class or series of stock ranking prior to such
stock in payment of dividends or distribution of assets or increase the
authorized amount of any Preferred Stock or any other series or class of capital
stock ranking prior to or on a parity with such stock without the consent of at
least two-thirds of the shares of Series B Preferred Stock or Series C Preferred
Stock, as applicable.
50
<PAGE> 55
DESCRIPTION OF MORTGAGE NOTES
GENERAL
The Mortgage Notes will be issued pursuant to an Indenture (the
"Indenture") between the Company and U.S. Trust Company of Texas, N.A., as
trustee (the "Trustee"). The terms of the Mortgage Notes include those stated in
the Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Mortgage
Notes are subject to all such terms, and holders of Mortgage Notes are referred
to the Indenture and the Trust Indenture Act for a statement thereof. The
following summary of the material provisions of the Indenture does not purport
to be exhaustive of all terms of the Indenture and is qualified in its entirety
by reference to the Indenture, including the definitions therein of certain
terms used below. A copy of the proposed form of Indenture has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part. The
definitions of certain terms used in the following summary are set forth below
under "-- Certain Definitions."
The Mortgage Notes will rank senior in right of payment to all subordinated
Indebtedness and pari passu in right of payment with all existing and future
senior Indebtedness of the Company, including borrowings under the Revolving
Credit Loan. The Mortgage Notes will be secured by certain assets of the Company
in the manner and to the extent summarized below under "-- Security."
For U.S. federal income tax purposes, holders of the Mortgage Notes will be
required to recognize interest income in respect of the Mortgage Notes in
advance of the receipt of cash payments attributable to interest income on such
Mortgage Notes. See "Material Federal Income Tax Consequences" for important
information concerning the U.S. federal income tax considerations associated
with the Mortgage Notes.
PRINCIPAL, MATURITY AND INTEREST
The Mortgage Notes will be limited in aggregate principal amount to $100.0
million and will mature on July 31, 2002. Fixed Interest on the Mortgage Notes
will accrue at the rate of 13% per annum and will be payable semiannually in
cash in arrears on February 28 and August 31 of each year (each, an "Interest
Payment Date"), commencing on February 28, 1996, to holders of record on the
immediately preceding February 15 and August 15 (each, a "Record Date"). Fixed
Interest on the Mortgage Notes will accrue from the most recent date to which
Fixed Interest has been paid or, if no Fixed Interest has been paid, from the
date of original issuance. Fixed Interest will be computed on the basis of a
360-day year comprised of twelve 30-day months. Additionally, installments of
accrued and unpaid Fixed Interest will become due and payable with respect to
any principal amount of the Mortgage Notes upon the maturity of such principal
amount of Mortgage Notes (whether at stated maturity, upon acceleration, upon
maturity of repurchase obligation or otherwise). Each installment of Fixed
Interest will be calculated to accrue from and including the most recent date to
which Fixed Interest has been paid or provided for (or from and including the
Closing Date if no installment of Fixed Interest has been paid), but not
including, the date of payment.
In addition to regular semiannual payments of Fixed Interest, the Mortgage
Notes will bear Contingent Interest, calculated as described below, from the
Closing Date to the date of payment of the Mortgage Notes. Installments of
accrued Contingent Interest will become due and payable semiannually on the
Interest Payment Date immediately following the Semiannual Period after the
Semiannual Period in which such Contingent Interest is accrued (e.g. Contingent
Interest for the Semiannual Periods ending June 30 and December 31 will be
payable on the following February 28 and August 31, respectively), unless such
installment of Contingent Interest is permitted to be deferred on such payment
date. Installments of deferred Contingent Interest will become due and payable
semiannually on each Interest Payment Date unless such installment of deferred
Contingent Interest is permitted to be deferred again on such payment date. All
payments of Contingent Interest that are not deferred will be payable on the
applicable Interest Payment Dates to the holders of record at the close of
business on the immediately preceding Record Date. Additionally, all
installments of accrued or deferred Contingent Interest will become due and
payable (and may not be further deferred) with respect to any principal amount
of the Mortgage Notes upon the maturity of such principal amount of Mortgage
Notes (whether at stated maturity, upon acceleration, upon maturity of
repurchase obligation or otherwise).
51
<PAGE> 56
The Company, at its option, may defer payment of all or a portion of any
installment of Contingent Interest then otherwise due if, and only to the extent
that, (a) the payment of such portion of Contingent Interest will cause the
Company's Adjusted Fixed Charge Coverage Ratio for the two consecutive
Semiannual Periods immediately preceding the Semiannual Period last completed
prior to such Interest Payment Date to be less than 2.0:1 on a pro forma basis
after giving effect to the assumed payment of such Contingent Interest but
before giving effect to the payment of any interest on the Mortgage Notes which
is then not payable and (b) the principal of the Mortgage Notes corresponding to
such Contingent Interest has not then matured and become due and payable
(whether at stated maturity, upon acceleration, upon maturity of repurchase
obligation or otherwise). Contingent Interest that is deferred shall become due
and payable on the earlier of (i) the next succeeding Interest Payment Date on
which such Contingent Interest is not permitted to be deferred, and (ii) upon
the maturity of the corresponding principal of the Mortgage Notes (whether at
stated maturity, upon acceleration, upon maturity of repurchase obligation or
otherwise). No interest will accrue on any Contingent Interest deferred and
which does not become due and payable. The aggregate amount of Contingent
Interest payable in any Semiannual Period will be reduced pro rata for
reductions in the outstanding principal amount of the Mortgage Notes prior to
the close of business on the record date immediately preceding such payment of
Contingent Interest.
Each installment of Contingent Interest will be calculated to accrue (an
"Accrual Period") from, but not including, the most recent date to which
Contingent Interest has been paid or provided for, the date through which
Contingent Interest had been calculated and deferred or, if no installment of
Contingent Interest has been paid or deferred, from and including the Closing
Date to, and including, either (a) the last day of the Semiannual Period
preceding the Semiannual Period last completed prior to such Interest Payment
Date if the corresponding principal of the Mortgage Notes has not become due and
payable or (b) the date of payment if the corresponding principal of the
Mortgage Notes has become due and payable (whether at stated maturity, upon
acceleration, upon maturity of repurchase obligation or otherwise); provided
that, in either case, Contingent Interest should be deemed not to accrue during
any Semiannual Period at the end of which the Company's Consolidated Cash Flow
during such Semiannual Period and the immediately preceding Semiannual Period is
less than $20.0 million. With respect to each Accrual Period, Contingent
Interest will accrue daily on the principal of each Mortgage Note outstanding
during such period as follows: (i) for any portion of an Accrual Period which
consists of all or part of a Semiannual Period that ends during such Accrual
Period, 1/180 of the Base Contingent Interest with respect to such principal
amount for such Semiannual Period until fully accrued and (ii) for any other
portion of an Accrual Period, 1/180 of the Base Contingent Interest with respect
to such principal amount for the Semiannual Period that began and last ended
after the Closing Date.
"Base Contingent Interest" means the interest payable on each Interest
Payment Date with respect to any principal amount of outstanding Mortgage Notes
in an amount equal to the product of (i) 4% of the Consolidated Cash Flow for
the Semiannual Period immediately preceding the Semiannual Period most recently
completed prior to such Interest Payment Date, up to a limit of the Contingent
Interest on $40.0 million of the Company's Consolidated Cash Flow during the
fiscal year in which such interest is accrued and (ii) a fraction, the numerator
of which is the aggregate principal amount of Mortgage Notes outstanding on the
close of business on the Record Date corresponding to such Interest Payment Date
and the denominator of which is $100.0 million.
Any reference in this Prospectus to "accrued and unpaid interest" includes
the amount of unpaid Contingent Interest due and payable.
Principal, premium, if any, and interest (including Contingent Interest, if
any) on the Mortgage Notes will be payable at the office or agency of the
Company maintained for such purpose within the City and State of New York. Until
otherwise designated by the Company, the Company's office or agency in New York
will be the office of the Trustee maintained for such purpose. The Mortgage
Notes will be issued in denominations of $1,000 and integral multiples thereof.
SECURITY
The Obligations of the Company under the Indenture and the Mortgage Notes
will be secured by delivery to the Trustee, as collateral agent, for the benefit
of the holders of the Mortgage Notes, of (i) the Freeport
52
<PAGE> 57
Deed of Trust creating a second priority security interest in the Company's
leasehold interests in the Freeport Facility (including the Company's interests
in furniture, fixtures and equipment); (ii) the Maxwell Deed of Trust creating a
first priority security interest in the Company's fee and leasehold interests in
the Maxwell Facility (including the Company's interests in furniture, fixtures
and equipment); (iii) the Stuttgart Mortgage creating a first priority security
interest in the Company's fee interest in the Stuttgart Facility (including the
Company's interests in furniture, fixtures and equipment); (iv) the Houston Deed
of Trust creating a first priority security interest in the Company's fee
interest in the Houston Property (including the Company's interests in
furniture, fixtures and equipment); (v) pledge agreements creating first
priority security interests in the Capital Stock of the Company held by ERLY
(other than 200,000 shares of the Company's Series B Preferred Stock pledged to
the holders of the Company's Series C Preferred Stock), the Capital Stock of the
Company's Subsidiaries held by the Company, the ERLY Intercompany Notes and the
Subsidiary Intercompany Notes; (vi) a security agreement creating a first
priority security interest in all registered U.S. trademarks, and a security
interest in all other registered trademarks, owned or licensed by the Company;
(vii) a pledge agreement creating a first priority security interest in the
Freeport IRBs until such time as the Freeport IRBs are remarketed by the
Company; and (viii) a pledge of all proceeds of the foregoing (including
insurance) (collectively, the "Collateral"). The Collateral will not include any
equipment subject to a purchase money lien that is a Permitted Lien to the
extent that a Lien in favor of the Trustee would breach the agreement governing
such purchase money lien or any assets in which the lender under the Revolving
Credit Loan (the "Revolving Credit Lender") has a priority Lien under the
Intercreditor Agreement.
The Company's lease of the Freeport Facility is for a primary term of 35
years commencing June 6, 1987, renewable at the option of the Company for seven
additional terms of five years each, and currently requires an annual lease
payment of approximately $150,000, which amount will increase annually by 2%. In
addition, the Company pays dockage, mooring, wharfage and other fees for
services provided by the lessor to the Company at rates established by the
harbor authority. The Company's lease of the Maxwell Facility, which covers
approximately half of the property of the Maxwell Facility, is for a primary
term of 60 years commencing October 1, 1974, renewable at the Company's option
for an additional term of 39 years, and requires monthly lease payments of $0.10
per hundredweight of rough rice processed at the facility up to a maximum of
$360,000 per year, or $90,000 per calendar quarter, for the initial term of the
lease. The leases for both facilities, as clarified by landlord estoppel
agreements to be entered into or before the Closing Date, will permit a mortgage
lien in favor of the Trustee to be placed on such leasehold interests and permit
the assignment of such leasehold interests by the Trustee following an Event of
Default.
The Collateral will secure the payment and performance when due of all of
the Obligations of the Company under the Indenture and the Mortgage Notes as
provided in the Collateral Documents. The Indenture will prohibit the Company
from creating or otherwise causing or suffering to exist any new direct
Subsidiary unless the Capital Stock of such Subsidiary owned by the Company and
any Subsidiary Intercompany Note to which such Subsidiary becomes a party are
pledged as Collateral pursuant to the Collateral Documents. Any claim of the
Company or the Trustee against the assets of any of the Company's Subsidiaries
will rank pari passu in right of payment against all Indebtedness of each such
Subsidiary to the extent of the Intercompany Notes to which such Subsidiary is a
party and effectively subordinate in right of payment against all other
Indebtedness of such Subsidiary. The Indenture also will prohibit the Company
from allowing any Subsidiary of the Company to create or otherwise suffer to
exist any Subsidiary of such Subsidiary.
So long as no Event of Default shall have occurred and be continuing, and
subject to certain terms and conditions in the Indenture and the Collateral
Documents, the Company and its Subsidiaries will be entitled to use the
Collateral in a manner consistent with normal business practices and the Company
and ERLY will be entitled to receive all cash dividends, interest and other
payments made upon or with respect to, and to exercise any voting and other
consensual rights pertaining to, the Capital Stock pledged by them and to
receive all payments with respect to the ERLY Intercompany Notes and the
Subsidiary Intercompany Notes pledged by them. Upon the occurrence and during
the continuance of an Event of Default, (a) (i) all rights of the Company and
ERLY to exercise voting or other consensual rights in connection with the
pledged Capital Stock shall cease, and all such rights shall become vested in
the Trustee, which, to the extent permitted by law
53
<PAGE> 58
and the Intercreditor Agreement, as described in the next paragraph, shall have
the sole right to exercise such voting and other consensual rights and (ii) all
rights of the Company and ERLY to receive all cash dividends, interest and other
payments made upon or with respect to the pledged Capital Stock and to receive
all payments with respect to the ERLY Intercompany Notes and the Subsidiary
Intercompany Notes pledged by them shall cease and such cash dividends, interest
and other payments shall be paid to the Trustee; and (b) the Trustee may sell
the Collateral or any part thereof in accordance with the terms of the
Collateral Documents, subject to the terms of the Intercreditor Agreement.
The rights of the Trustee under the Collateral Documents will be subject to
the terms of the Intercreditor Agreement between the Trustee and the Revolving
Credit Lender. Pursuant to the Intercreditor Agreement, the Revolving Credit
Lender will expressly agree that the Liens against the Collateral in favor of
the Trustee are, except as described below in this paragraph, senior, superior,
and prior in all respects to any Lien such lender may have against any assets
constituting Collateral. The Intercreditor Agreement provides that the Revolving
Credit Loan (i) may be secured by a first priority Lien on the Company's
accounts receivable, inventory (and the proceeds therefrom) and related
collateral, Liens on other assets of the Company that are not Collateral and
Liens on the Collateral that are junior to the Liens in favor of the Trustee,
(ii) may be guaranteed on a senior basis by certain of the Company's
Subsidiaries, which guarantees may be secured by such Subsidiaries' accounts
receivable, inventory (and the proceeds therefrom) and related collateral, and
(iii) may not be guaranteed by ERLY. The Intercreditor Agreement also will
provide that (a) the Revolving Credit Lender may not foreclose on any of the
Company's assets that constitute Collateral or, except as described in clause
(b) of this paragraph, exercise remedies with respect to the Collateral until
the Company's Obligations under the Indenture and the Mortgage Notes have been
satisfied in full; (b) in order to realize upon or liquidate the Revolving
Credit Lender's inventory collateral, following any default under and
acceleration of the Revolving Credit Loan, the Revolving Credit Lender will
have, for a period of up to 90 days from the earlier of (1) the date on which
the Revolving Credit Lender first takes possession of the inventory collateral
securing its Lien and (2) the date on which the Revolving Credit Lender receives
written notice from the Trustee after it first takes possession of the
Collateral, the right to obtain access to and utilize the Company's rice
processing facilities and affix the Company's trademarks to inventory in or
processed in such facilities, and the continuing right to use such trademarks in
connection with the Revolving Credit Lender's disposition of inventory that was
contained in or processed in such facilities during such 90-day period, provided
that such lender will pay to the Trustee for the benefit of the holders of the
Mortgage Notes all depreciation expenses related to equipment used by such
lender in connection therewith during any period after the first 45 days of such
90-day period and, provided further, that such 90-day period, in either case,
will be tolled if and for so long as the Company's inventory and trademarks are
subject to an automatic stay in connection with a bankruptcy proceeding
involving the Company; and (c) except as provided in clause (b) of this
paragraph, the Revolving Credit Lender will be obligated to release its Liens
on, and will have no claim against, the Collateral in connection with any
exercise of remedies by the Trustee. The Revolving Credit Lender will waive any
rights it may have to direct the order or manner of any sale of any assets which
constitute Collateral. Except to the extent otherwise required by law, proceeds
of any of the Collateral will be applied first to pay expenses of sale, then,
subject to the Company's right to reinvest the proceeds pursuant to the
provisions under the caption "-- Repurchase at the Option of Holders -- Asset
Sales," to amounts payable to the Trustee under the Indenture and the Collateral
Documents, and then to pay amounts due under the Mortgage Notes. After the
Mortgage Notes are paid in full, any proceeds of Collateral in which the
Revolving Credit Lender has a Lien will be paid to such lender. The rights of
the Revolving Credit Lender could delay the exercise of remedies by the Trustee,
and there can be no assurance that such rights will not adversely affect the
ability to sell any or all of the Collateral or the amount realized on such
sale.
Under the terms of the Collateral Documents, the Trustee will determine the
circumstances and manner in which the Collateral shall be disposed of,
including, but not limited to, the determination of whether to release all or
any portion of the Collateral from the Liens created by the Collateral Documents
and whether to foreclose on the Collateral following an Event of Default.
Moreover, upon the full and final payment and performance of all Obligations of
the Company under the Indenture and the Mortgage Notes, the Collateral Documents
shall terminate and the Collateral shall be released. In addition, in the event
that any of the Collateral is sold as permitted under the Indenture and the Net
Cash Proceeds are pledged and/or applied in
54
<PAGE> 59
accordance with the terms of the provisions under "-- Repurchase at the Option
of Holders -- Asset Sales," the Trustee shall release the Liens in favor of the
Trustee in the assets sold; provided, that such Net Cash Proceeds are deposited
into a segregated bank account and pledged to the Trustee on or before the date
of such Asset Sale and the Trustee shall have received from the Company on or
before the date of such Asset Sale an Officers' Certificate and an Opinion of
Counsel that a valid Lien in such Net Cash Proceeds has been perfected in favor
of the Trustee. Such pledged Net Cash Proceeds may be reinvested, and the
Trustee will release or reduce the amount of the Net Cash Proceeds subject to
the Trustee's Lien on such Net Cash Proceeds to the extent of such reinvestment,
in accordance with the terms of the provisions under "-- Repurchase at the
Option of Holders -- Asset Sales," provided that the Trustee shall have received
from the Company on or before the date such Net Cash Proceeds are so applied an
Officers' Certificate and an Opinion of Counsel that such Net Cash Proceeds have
been or will be so applied and that a valid Lien in the assets in which such Net
Cash Proceeds are reinvested has been perfected in favor of the Trustee.
The value of the Collateral in the event of a liquidation will depend on
market and economic conditions, the availability of buyers and similar factors.
It is possible that the net proceeds realized from any sale of the Collateral
would not be sufficient to pay the Indebtedness represented by the Mortgage
Notes. As a result of the foregoing, holders of the Mortgage Notes may receive
only limited benefits from their security interest in the Collateral. The rights
of any holder of the Mortgage Notes to take any action to enforce the Company's
Obligations under the Mortgage Notes will be limited by the terms of the
Indenture so as to avoid impairment or loss of the Liens on the Collateral in
favor of the Trustee pursuant to applicable state laws.
The release of any Collateral from the terms of the Collateral Documents
will not be deemed to impair the security under the Indenture in contravention
of the provisions thereof and of the Collateral Documents if and to the extent
the Collateral is released pursuant to the terms of the Indenture and the
Collateral Documents. To the extent applicable, the Company shall comply with
Section 314(d) of the Trust Indenture Act.
OPTIONAL REDEMPTION
The Mortgage Notes will not be redeemable at the Company's option prior to
July 31, 1999. Thereafter, the Mortgage Notes will be subject to redemption at
the option of the Company, in whole or in part, upon not less than 30 nor more
than 60 days' notice, at the redemption prices (expressed as percentages of
aggregate principal amount) set forth below, plus accrued and unpaid interest
thereon to the applicable redemption date, if redeemed during the twelve-month
period beginning on July 31 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
------ ----------
<S> <C>
1999.............................................................. 107.0%
2000.............................................................. 104.0
2001 and thereafter............................................... 100.0
</TABLE>
Notwithstanding the foregoing, until August 31, 1998, the Company may
redeem at its option up to one-third of the initial aggregate principal amount
of the Mortgage Notes at a redemption price of 107% of the aggregate principal
amount thereof, plus accrued and unpaid interest to the date of redemption, with
the net proceeds received by the Company from a public offering of common stock
of the Company; provided that at least two-thirds of the initial aggregate
principal amount of the Mortgage Notes remains outstanding immediately after the
occurrence of such redemption and such redemption shall occur within 60 days of
the date of the closing of such public offering.
MANDATORY REDEMPTION
Except as set forth below under "Repurchase at the Option of Holders," the
Company is not required to make mandatory redemption or sinking fund payments
with respect to the Mortgage Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, each holder of Mortgage Notes
will have the right to require the Company to repurchase all or any part (equal
to $1,000 in principal amount or an integral multiple
55
<PAGE> 60
thereof) of such holder's Mortgage Notes pursuant to the offer described below
(the "Change of Control Offer") at an offer price in cash equal to 101% (or 100%
if such Change of Control occurs on or after July 31, 2001) of the Accreted
Value thereof, plus accrued and unpaid interest thereon to the date of
repurchase (the "Change of Control Payment"). Within ten days following any
Change of Control, the Company will mail a notice to each holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase Mortgage Notes pursuant to the procedures required by the
Indenture and described in such notice. The Company will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities laws
and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Mortgage Notes as a result
of a Change of Control.
On the date of the Change of Control Payment, the Company will, to the
extent lawful, (1) accept for payment all Mortgage Notes or portions thereof
properly tendered pursuant to the Change of Control Offer, (2) deposit with the
paying agent an amount equal to the Change of Control Payment in respect of all
Mortgage Notes or portions thereof so tendered and (3) deliver or cause to be
delivered to the Trustee the Mortgage Notes so accepted together with an
Officers' Certificate stating the aggregate Accreted Value of the Mortgage Notes
being purchased by the Company. The paying agent will promptly mail to each
holder of Mortgage Notes so tendered the Change of Control Payment for such
Mortgage Notes, and the Trustee will promptly authenticate and mail (or cause to
be transferred by book entry) to each holder a new Mortgage Note equal in
principal amount to any unpurchased portion of the Mortgage Notes surrendered,
if any; provided that each such new Mortgage Note will be in a principal amount
of $1,000 or an integral multiple thereof. The Company will publicly announce
the results of the Change of Control Offer on or as soon as practicable after
the date of the Change of Control Payment.
Except as described above with respect to a Change of Control, the
Indenture does not contain provisions that permit the holders of the Mortgage
Notes to require that the Company repurchase or redeem the Mortgage Notes in the
event of a takeover, recapitalization or similar restructuring.
The exercise by the holders of Mortgage Notes of their right to require the
Company to repurchase the Mortgage Notes could cause a default under the
Company's other senior Indebtedness, even if the Change of Control itself does
not, due to the financial effect of such repurchases on the Company. Although
the obligations of the Company with respect to the Mortgage Notes are secured by
the Collateral, there can be no assurance that the proceeds of a sale of such
Collateral will be sufficient to satisfy payments due on the Mortgage Notes upon
a Change of Control. Finally, the Company's ability to pay cash to the holders
of Mortgage Notes upon a repurchase may be limited by the Company's then
existing financial resources.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange
Act), (ii) the adoption of a plan relating to the liquidation or dissolution of
the Company, (iii) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
"person" (as defined above), other than Douglas A. Murphy or Gerald D. Murphy,
acquires a direct or indirect interest in more than 50% of the voting power of
the Voting Stock of the Company or (iv) the first day on which a majority of the
members of the Board of Directors of the Company are not Continuing Directors.
For purposes of this definition, any transfer of an equity interest of an entity
that was formed for the purpose of acquiring Voting Stock of the Company will be
deemed to be a transfer of such portion of such Voting Stock as corresponds to
the portion of the equity of such entity that has been so transferred.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a holder of Mortgage Notes to require the
Company to repurchase such Mortgage Notes as a result of a sale, lease,
transfer, conveyance or other disposition of less than all of the assets of the
Company and its Subsidiaries taken as a whole to another Person or group may be
uncertain.
56
<PAGE> 61
Asset Sales
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, engage in an Asset Sale unless (i) the Company (or
the Subsidiary, as the case may be) receives consideration at the time of such
Asset Sale at least equal to the fair market value (evidenced by a resolution of
the Board of Directors set forth in an Officers' Certificate delivered to the
Trustee) of the assets or Equity Interests issued or sold or otherwise disposed
of; (ii) at least 85% of the Net Proceeds therefor received by the Company or
such Subsidiary is in the form of cash or Cash Equivalents, provided that, with
respect to the Houston Property, at least 50% of the Net Proceeds therefor
received by the Company must be in the form of cash or Cash Equivalents, and
provided further that any notes or other obligations received by the Company or
any Subsidiary as consideration in connection with an Asset Sale shall be
counted as "Net Proceeds" only to the extent such notes or other obligations are
immediately converted by the Company or such Subsidiary into cash (and then only
to the extent of the cash received); and (iii) if such Asset Sales involve
Collateral, the Company obtains a release of the Lien from the Trustee on such
Collateral on or before the date such Asset Sale occurs.
The Indenture also will provide that the Company will sell the Houston
Property to a third party that is not an Affiliate of the Company or ERLY within
18 months following the Closing Date in accordance with the provisions hereof
relating to Asset Sales. If the Company fails to sell the Houston Property by
such date, then the Company will become obligated to pay liquidated damages
("Liquidated Damages") to each holder of Mortgage Notes in an amount equal to
$0.048 per week per $1,000 principal amount of Mortgage Notes held by such
holder for each week or portion thereof that the sale of the Houston Property
has not been effected. All accrued Liquidated Damages will be deemed to be
interest for purposes of the Indenture and will be paid by the Company on the
same dates and in the same manner as regular interest payments on the Mortgage
Notes.
Within one year after the receipt of any Net Cash Proceeds from an Asset
Sale, the Company (or the Subsidiary, as the case may be) may apply such Net
Cash Proceeds to an investment in another business, the making of a capital
expenditure or the acquisition of other tangible assets, in each case, in a
Related Business; provided, that if any Collateral is sold, (a) any Net Proceeds
received from such Asset Sale that are not in the form of cash or Cash
Equivalents will be pledged to the Trustee to secure the Company's Obligations
under the Mortgage Notes and the Indenture; (b) if the Net Cash Proceeds from
such sales (either individually or when combined with the Excess Proceeds (as
defined below) from sales of Collateral during such one year period) exceed $1.0
million, then such Net Cash Proceeds shall be held in a segregated account
(which may, at the Company's option, be invested in Cash Equivalents) that will
be pledged to the Trustee to secure the Company's Obligations under the Mortgage
Notes and the Indenture until such Net Cash Proceeds are either reinvested or
applied to redeem the Mortgage Notes as described below; and (c) if any such Net
Cash Proceeds are reinvested, such Net Cash Proceeds shall only be reinvested in
the type of assets of the Company defined as Collateral under the Collateral
Documents and similar in character to the assets sold, and only if the assets
acquired by such reinvestment are subject to a perfected Lien in favor of the
Trustee (with the same priority as the Lien on the Collateral that was the
subject of the Asset Sale); and provided further that if any such Net Cash
Proceeds consist of proceeds of insurance paid on account of the loss or damage
to any property, or compensation or other proceeds for any property taken by
condemnation, eminent domain or similar proceedings, such proceeds may be
applied to reimburse the Company or any of its Subsidiaries, as applicable, for
expenditures made, and cost incurred, to repair, rebuild, replace or restore the
property subject to such loss, damage or taking so long as the Company utilizes
such Net Cash Proceeds in accordance with clauses (a), (b) and (c) of this
paragraph.
Any Net Cash Proceeds from any Asset Sales that are not applied or
reinvested as provided above will be deemed to constitute "Excess Proceeds."
Pending the final application of any such Net Cash Proceeds (other than proceeds
from an Asset Sale of assets constituting Collateral), the Company or such
Subsidiary may temporarily reduce the Revolving Credit Loan or otherwise invest
such Net Cash Proceeds in any manner that is not prohibited by the Indenture.
When the aggregate amount of Excess Proceeds exceeds $5.0 million, the Company
will be required to make an offer to all holders of Mortgage Notes (an "Asset
Sale Offer") to purchase up to a maximum aggregate principal amount (expressed
as an integral multiple of $1,000) of Mortgage Notes equal to the Excess
Proceeds at an offer price in cash equal to 100% of the Accreted Value
57
<PAGE> 62
thereof, plus accrued and unpaid interest thereon to the date of repurchase, in
accordance with the procedures set forth in the Indenture. To the extent that
the aggregate Accreted Value of the Mortgage Notes tendered pursuant to an Asset
Sale Offer is less than the Excess Proceeds, the Company may use any remaining
Excess Proceeds for general corporate purposes. If the aggregate Accreted Value
of the Mortgage Notes surrendered by holders thereof exceeds the amount of
Excess Proceeds, the Trustee shall select the Mortgage Notes in accordance with
the provisions under the caption "-- Selection and Notice." Upon completion of
such offer to purchase, the amount of Excess Proceeds shall be reset at zero.
Freeport IRBs
The Indenture will provide that upon the remarketing by the Company of the
Freeport IRBs in accordance with the provisions described under the caption
"-- Certain Covenants -- Incurrence of Indebtedness and Issuance of Preferred
Stock," the Company will be required to make an offer to all holders of the
Mortgage Notes to purchase the maximum aggregate principal amount (expressed as
an integral multiple of $1,000) of Mortgage Notes that may be purchased out of
the net proceeds of such remarketing at an offer price in cash equal to 100% of
the Accreted Value of the Mortgage Notes, plus accrued and unpaid interest
thereon to the date of repurchase, in accordance with the procedures set forth
in the Indenture. To the extent that the aggregate amount of Mortgage Notes
tendered pursuant to such offer is less than the net proceeds of such
remarketing, the Company may use any remaining net proceeds for general
corporate purposes. If the aggregate Accreted Value of the Mortgage Notes
surrendered by holders thereof exceeds the amount of net proceeds, the Trustee
will select the Mortgage Notes in accordance with the provisions under the
caption "-- Selection and Notice."
SELECTION AND NOTICE
If less than all of the Mortgage Notes are to be redeemed at any time,
selection of Mortgage Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which the Mortgage Notes are listed, or, if the Mortgage Notes are
not so listed, on a pro rata basis, by lot or by such method as the Trustee
shall deem fair and appropriate; provided that no Mortgage Notes of $1,000 in
principal amount or less shall be redeemed in part. Notices of redemption shall
be mailed by first class mail at least 30 but not more than 60 days before the
redemption date to each holder of Mortgage Notes to be redeemed at its
registered address. If any Mortgage Note is to be redeemed in part only, the
notice of redemption that relates to such Mortgage Note shall state the portion
of the principal amount thereof to be redeemed. A new Mortgage Note in principal
amount equal to the unredeemed portion thereof will be issued in the name of the
holder thereof upon cancellation of the original Mortgage Note. On and after the
redemption date, interest ceases to accrue on Mortgage Notes or portions of them
called for redemption.
CERTAIN COVENANTS
Restricted Payments
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any distribution on account of the Company's or any of its
Subsidiaries' Equity Interests (other than dividends or distributions payable in
Equity Interests (other than Disqualified Stock) of the Company or dividends or
distributions payable to the Company or any Wholly Owned Subsidiary of the
Company); (ii) purchase, redeem or otherwise acquire or retire for value any
Equity Interests of the Company or any direct or indirect parent of the Company
or other Affiliate of the Company (other than any such Equity Interests owned by
the Company or any Wholly Owned Subsidiary of the Company); (iii) make any
principal payment on, or purchase, redeem, defease or otherwise acquire or
retire for value any Indebtedness that is subordinated in right of payment to
the Mortgage Notes; or (iv) make any Restricted Investment (all such payments
and other actions set forth in clauses (i) through (iv) above being collectively
referred to as "Restricted Payments"), unless, at the time of and after giving
effect to such Restricted Payment:
(a) no Event of Default shall have occurred and be continuing or would
occur as a consequence thereof;
58
<PAGE> 63
(b) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test set forth in the first paragraph of
the covenant described below under caption "-- Incurrence of Indebtedness
and Issuance of Preferred Stock";
(c) after giving effect to such Restricted Payment and the incurrence
of any Indebtedness the net proceeds of which are used to finance such
Restricted Payment, the Company's Indebtedness to Cash Flow Ratio would not
have exceeded 3.0 to 1;
(d) immediately after such Restricted Payment (the value of any such
payment, of other than cash, being determined by the Board of Directors and
evidenced by a resolution set forth in an Officers' Certificate delivered
to the Trustee) and after giving effect thereto on a pro forma basis, the
Consolidated Net Worth of the Company would be more than $50.0 million; and
(e) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Subsidiaries after the date
of the Indenture (excluding Restricted Payments permitted by clauses (ii)
and (iii) in the next succeeding paragraph), is less than the sum of (i)
50% of the Consolidated Net Income of the Company for the period (taken as
one accounting period) from the beginning of the first fiscal quarter
commencing after the date of the Indenture to the end of the Company's most
recently ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, if such Consolidated
Net Income for such period is a deficit, less 100% of such deficit), plus
(ii) 100% of the aggregate net cash proceeds received by the Company from
the issue or sale since the date of the Indenture of Equity Interests of
the Company or of debt securities of the Company that have been converted
into such Equity Interests (other than Equity Interests (or convertible
debt securities) sold to a Subsidiary of the Company and other than
Disqualified Stock or debt securities that have been converted into
Disqualified Stock), plus (iii) to the extent that any Restricted
Investment that was made after the date of the Indenture is sold for cash
or otherwise liquidated or repaid for cash, the lesser of (A) the cash
return of capital with respect to such Restricted Investment (less the cost
of disposition, if any) and (B) the initial amount of such Restricted
Investment, plus (iv) $2.0 million.
The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement or other acquisition of
any Equity Interests of the Company in exchange for, or out of the proceeds of,
the substantially concurrent sale (other than to a Subsidiary of the Company) of
other Equity Interests of the Company (other than any Disqualified Stock),
provided, that the amount of any such net cash proceeds that are utilized for
any such redemption, repurchase, retirement or other acquisition shall be
excluded from clause (c)(ii) of the preceding paragraph; (iii) the defeasance,
redemption or repurchase of subordinated Indebtedness with the net cash proceeds
from an incurrence of Permitted Refinancing Indebtedness or the substantially
concurrent sale (other than to a Subsidiary of the Company) of Equity Interests
of the Company (other than Disqualified Stock), provided that the amount of any
such net cash proceeds that are utilized for any such redemption, repurchase,
retirement or other acquisition shall be excluded from clause (c)(ii) of the
preceding paragraph; (iv) the repurchase, redemption or other acquisition or
retirement for value of any Equity Interests of the Company or any Subsidiary of
the Company held by any member of the Company's (or any of its Subsidiaries')
management pursuant to any management equity subscription agreement or stock
option agreement in effect as of the date of the Indenture, provided that the
aggregate price paid for all such repurchased, redeemed, acquired or retired
Equity Interests shall not exceed $250,000 in any twelve-month period plus the
aggregate cash proceeds received by the Company during such twelve-month period
from any reissuance of Equity Interests by the Company to members of management
of the Company and its Subsidiaries, and no Default or Event of Default shall
have occurred and be continuing immediately after such transaction; (v) any
payment or other distribution pursuant to the terms of the Management Agreement
and the Tax Sharing Agreement, as such agreements exist on the date of the
Indenture, provided that payments made pursuant to the Management Agreement will
be permitted only if (a) the Company has paid all payments of principal,
59
<PAGE> 64
premium, if any, and interest (including all Contingent Interest accrued or
deferred) due on the Mortgage Notes at the time payment of such fees is made and
(b) the Company's Consolidated Cash Flow for the four fiscal quarters last
completed prior to such payment is at least $19.0 million; (vi) any payments of
dividends or distributions on account of the Equity Interests in ARI-Vinafood
held by Central Food Corporation II, a company organized under the laws of the
Socialist Republic of Vietnam ("Central Food Corporation II"), provided that,
concurrently with such payments ARI-Vinafood pays to the Company a dividend or
distribution on account of the Company's Equity Interests in ARI-Vinafood
proportionate to the Company's ownership interest in ARI-Vinafood; (vii) capital
contributions (in any form) by the Company to ARI-Vinafood pursuant to that
certain Joint Venture Contract dated July 27, 1994 between Central Food
Corporation II and the Company in an aggregate amount not to exceed $1.0
million; (viii) a loan of $10.5 million in aggregate principal amount to ERLY
that is evidenced by the 15% ERLY Intercompany Note and pledged to the Trustee
as Collateral for the Mortgage Notes; (ix) any intercompany loan by the Company
to any Subsidiary that is not a Wholly Owned Subsidiary of up to $2.0 million
and which is evidenced by a Subsidiary Intercompany Note that is pledged to the
Trustee as Collateral for the Mortgage Notes, provided that the aggregate amount
of all such loans may not exceed $10.0 million at any one time, provided further
that (a) any subsequent issuance or transfer of Equity Interests that results in
the Obligations under any such intercompany loan being owed by a Person other
than a Subsidiary of the Company and (b) any sale or other transfer of the
Obligations under any such intercompany loan to a Person that is not either the
Company or a Subsidiary shall be deemed, in each case, to constitute a
Restricted Payment by the Company or such Subsidiary, as the case may be; or (x)
any payments of principal and interest on account of the Freeport IRBs made to
any Person other than an Affiliate of the Company after the Company remarkets
the Freeport IRBs.
The amount of all Restricted Payments (other than cash) shall be the fair
market value (evidenced by a resolution of the Board of Directors set forth in
an Officers' Certificate delivered to the Trustee) on the date of the Restricted
Payment of the asset(s) proposed to be transferred by the Company or such
Subsidiary, as the case may be, pursuant to the Restricted Payment. Not later
than the date of making any Restricted Payment, the Company shall deliver to the
Trustee an Officers' Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
the covenant "Restricted Payments" were computed, which calculations may be
based upon the Company's latest available financial statements.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guaranty or otherwise become directly or indirectly liable, contingently
or otherwise, with respect to (collectively, "incur") any Indebtedness
(including Acquired Debt) and that the Company will not issue any Disqualified
Stock and will not permit any of its Subsidiaries to issue any shares of
Preferred Stock; provided, however, that the Company and its Subsidiaries may
incur Indebtedness (including Acquired Debt) or issue shares of Disqualified
Stock if the Fixed Charge Coverage Ratio for the Company's most recently ended
four full fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness is incurred
or such Disqualified Stock is issued would have been at least 2.25:1 from the
Closing Date through July 31, 1996, at least 2.5:1 from August 1, 1996 through
July 31, 1997, at least 2.75:1 from August 1, 1997 through July 31, 1998 and at
least 3.0:1 from August 1, 1998 and thereafter, determined on a pro forma basis
(including a pro forma application of the net proceeds therefrom), as if the
additional Indebtedness had been incurred, or the Disqualified Stock had been
issued, as the case may be, at the beginning of such four-quarter period.
The foregoing provisions will not apply to:
(i) the incurrence by the Company of revolving credit Indebtedness and
letters of credit pursuant to the Revolving Credit Loan for working capital
purposes (with letters of credit being deemed to have a principal amount
equal to the maximum potential liability of the Company thereunder) in an
aggregate principal amount not to exceed the amount of the Borrowing Base;
(ii) the incurrence by the Company of Indebtedness represented by the
Mortgage Notes;
60
<PAGE> 65
(iii) the incurrence by the Company or any of its Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund,
Indebtedness that was permitted by the Indenture to be incurred;
(iv) the incurrence by the Company or any of its Subsidiaries of
Indebtedness represented by Capital Lease Obligations, mortgage financings
or purchase money obligations, in each case incurred for the purpose of
financing all or any part of the purchase price or cost of construction or
improvement of property used in the business of the Company or such
Subsidiary, in an aggregate principal amount not to exceed $10.0 million at
any time outstanding; provided that none of the Company or the Subsidiaries
shall incur any Indebtedness pursuant to this clause (iv) that creates a
security interest in, causes a Lien (other than a Permitted Lien) to be
placed against or otherwise encumbers the Collateral;
(v) the incurrence by the Company or any of its Wholly Owned
Subsidiaries of intercompany Indebtedness between or among the Company and
any of its Wholly Owned Subsidiaries; provided, however, that, except to
the extent that such Indebtedness may be incurred pursuant to the next
paragraph, (a) any subsequent issuance or transfer of Equity Interests that
results in any such Indebtedness being held by a Person other than a Wholly
Owned Subsidiary and (b) any sale or other transfer of any such
Indebtedness to a Person that is not either the Company or a Wholly Owned
Subsidiary shall be deemed, in each case, to constitute an incurrence of
such Indebtedness by the Company or such Wholly Owned Subsidiary, as the
case may be;
(vi) the incurrence by any Subsidiary of the Company that is not a
Wholly Owned Subsidiary of intercompany Indebtedness between the Company
and such Subsidiary in an aggregate principal amount not to exceed $2.0
million at any time with respect to such Subsidiary; provided that the
aggregate amount of Indebtedness incurred by the Company's Subsidiaries
pursuant to this paragraph (vi) shall not exceed $10.0 million at any one
time;
(vii) the incurrence by the Company of Indebtedness under a letter of
credit in such amount and to the extent necessary to remarket the Freeport
IRBs; provided that the Fixed Charge Coverage Ratio, as determined above,
would have been at least 2.5:1;
(viii) the incurrence by ARI-Vinafood of Non-Recourse Debt; and
(ix) the incurrence by the Company or any of its Subsidiaries of
Indebtedness not otherwise permitted to be incurred pursuant to the
provisions described above in an aggregate principal amount not to exceed
$2.0 million at any one time outstanding.
Limitation on Operating Lease Obligations
The Indenture will provide that the Company shall not, and shall cause each
of its Subsidiaries not to, directly or indirectly create or otherwise suffer to
exist additional Operating Lease Obligations not in existence on the Closing
Date, unless the amount of additional minimum rental payments (determined in
accordance with GAAP) incurred as a result of such additional Operating Lease
Obligations does not exceed $2.5 million in the aggregate on a pro forma basis
for the 12 months preceding and including the date such proposed additional
Operating Lease Obligation is incurred; provided, however, that this restriction
will not apply to (i) any renewal or extension by the Company of an Operating
Lease Obligation existing on the Closing Date on substantially similar terms,
allowing for adjustment of rental payments to reflect market prices and
customary extensions and rate adjustments on the same assets previously leased,
or (ii) Operating Lease Obligations with a term of less than one year.
Limitation on Rice Contract Policies and Procedures
The Indenture will provide that the Company may not, without first
obtaining the consent of the holders of a majority in aggregate principal amount
of the Mortgage Notes then outstanding, modify or revoke the Company's policies
and procedures with respect to the trading of rice futures contracts adopted by
the Company's Board of Directors on September 22, 1994 (other than modifications
necessary to reflect changes
61
<PAGE> 66
in the terms of employment of the employees identified in such policies and
procedures), which policies and procedures are attached as an exhibit to the
Indenture.
Limitation on Capital Expenditures
The Indenture will provide that, if the Consolidated Cash Flow of the
Company for a fiscal year does not exceed $30.0 million, then the Capital
Expenditures for the Company and its Subsidiaries for the next succeeding fiscal
year may not exceed the sum of (a) $5.5 million and (b) the Carryover Amount
determined with respect to such prior fiscal year.
Liens
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create, incur, assume or
suffer to exist any Lien on any asset now owned or hereafter acquired, or any
income or profits therefrom or assign or convey any right to receive income
therefrom, except Permitted Liens.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any encumbrance or restriction on the
ability of any Subsidiary to (i)(a) pay dividends or make any other
distributions to the Company or any of its Subsidiaries (1) on its Capital Stock
or (2) with respect to any other interest or participation in, or measured by,
its profits, or (b) pay any Indebtedness owed to the Company or any of its
Subsidiaries, (ii) make loans or advances to the Company or any of its
Subsidiaries or (iii) transfer any of its properties or assets to the Company or
any of its Subsidiaries, except for such encumbrances or restrictions existing
under or by reason of (a) existing agreements evidencing Indebtedness as in
effect on the date of the Indenture, including the Revolving Credit Loan, and
restrictions against intersubsidiary loans, advances or transfers contained in
the Revolving Credit Loan, (b) the Indenture and the Mortgage Notes, (c)
applicable law, (d) any instrument governing Indebtedness or Capital Stock of a
Person acquired by the Company or any of its Subsidiaries as in effect at the
time of such acquisition (except to the extent such Indebtedness was incurred in
connection with or in contemplation of such acquisition), which encumbrance or
restriction is not applicable to any Person, or the properties or assets of any
Person, other than the Person, or the property or assets of the Person, so
acquired, provided that the Consolidated Cash Flow of such Person is not taken
into account in determining whether such acquisition was permitted by the terms
of the Indenture, (e) by reason of customary non-assignment provisions in leases
entered into in the ordinary course of business and consistent with past
practices, (f) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature described in clause
(iii) above on the property so acquired, or (g) Permitted Refinancing
Indebtedness, provided that the restrictions of the nature described in clauses
(i), (ii) and (iii) above contained in the agreements governing such Permitted
Refinancing Indebtedness are no more restrictive than those contained in the
agreements governing the Indebtedness being refinanced.
Merger, Consolidation or Sale of Assets
The Indenture will provide that the Company may not consolidate or merge
with or into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions, to another
Person unless (i) the Company is the surviving corporation or the Person formed
by or surviving any such consolidation or merger (if other than the Company) or
to which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia; (ii) the
Person formed by or surviving any such consolidation or merger (if other than
the Company) or the Person to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made assumes all the obligations
of the Company under the Mortgage Notes, the Indenture and the Collateral
Documents pursuant to a supplemental indenture or other documents or instruments
in form reasonably satisfactory to the Trustee; (iii) immediately after such
transaction no Default
62
<PAGE> 67
or Event of Default exists; (iv) the owner of the Capital Stock of the Person
formed by or surviving any such consolidation or merger (if other than the
Company) or the Person to which such sale, assignment, transfer, lease,
conveyance or other disposition has been made shall have pledged to the Trustee
all of the issued and outstanding Capital Stock of the surviving corporation or
the Company, as the case may be (with the same priority as the Lien on the
Capital Stock of the Company owned by ERLY); (v) the perfection and priority of
the Liens in the Collateral in favor of the Trustee are not impaired, except for
the Lien on the Capital Stock of the Company owned by ERLY, which Lien may be
released upon such merger, consolidation or sale of assets if the other
conditions herein are satisfied; and (vi) the Company or the Person formed by or
surviving any such consolidation or merger (if other than the Company), or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made, (A) will have Consolidated Net Worth immediately after the
transaction equal to or greater than the Consolidated Net Worth of the Company
immediately preceding the transaction and (B) will, at the time of such
transaction and after giving pro forma effect thereto as if such transaction had
occurred at the beginning of the applicable four-quarter period, be permitted to
incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge
Coverage Ratio test set forth in the first paragraph of the covenant described
above under the caption "-- Incurrence of Indebtedness and Issuance of Preferred
Stock."
Transactions with Affiliates
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, sell, lease, transfer or otherwise dispose of any of
its properties or assets to, or purchase any property or assets from, or enter
into or make any contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless (i) such Affiliate Transaction is on terms that are no
less favorable to the Company or the relevant Subsidiary than those that would
have been obtained in a comparable transaction by the Company or such Subsidiary
with an unrelated Person and (ii) the Company delivers to the Trustee (a) with
respect to any Affiliate Transaction involving aggregate consideration in excess
of $1.0 million, a resolution of the Board of Directors set forth in an
Officers' Certificate certifying that such Affiliate Transaction complies with
clause (i) above and that such Affiliate Transaction has been approved by a
majority of the disinterested members of the Board of Directors and (b) with
respect to any Affiliate Transaction involving aggregate consideration in excess
of $5.0 million, an opinion as to the fairness to the Company or such Subsidiary
of such Affiliate Transaction from a financial point of view issued by an
investment banking firm of national standing; provided that (x) any employment
agreement entered into by the Company or any of its Subsidiaries in the ordinary
course of business and consistent with the past practice of the Company or such
Subsidiary, (y) transactions between or among the Company and/or its
Subsidiaries and (z) transactions permitted by the provisions of the Indenture
described above under the caption "-- Restricted Payments," in each case, shall
not be deemed Affiliate Transactions.
Advances to Subsidiaries
The Indenture will provide that all advances to Subsidiaries made by the
Company from time to time after the date of the Indenture will be evidenced by
unsecured Subsidiary Intercompany Notes in favor of the Company that will be
pledged to the Trustee as Collateral to secure the Mortgage Notes. The Indenture
also will provide that all advances by the Company to any Subsidiary of the
Company outstanding on the date of the Indenture will be evidenced by an
unsecured Subsidiary Intercompany Note that will be pledged to the Trustee as
Collateral for the Mortgage Notes. Each Subsidiary Intercompany Note will be
payable upon demand, will bear interest at the same rate as the Mortgage Notes,
will be pari passu in right of payment with all present and future senior
Indebtedness of the Subsidiary to which such loan is made and senior to all
future subordinated Indebtedness of such Subsidiary. A form of Subsidiary
Intercompany Note will be attached as an annex to the Company Pledge Agreement
(as such term is defined in the Indenture).
Limitation on Issuances and Sales of Capital Stock of Wholly Owned
Subsidiaries
The Indenture will provide that the Company (i) will not, and will not
permit any Wholly Owned Subsidiary of the Company to, transfer, convey, sell or
otherwise dispose of any Capital Stock of any Wholly
63
<PAGE> 68
Owned Subsidiary of the Company to any Person (other than the Company), unless
(a) such transfer, conveyance, sale or other disposition is of all the Capital
Stock of such Wholly Owned Subsidiary and (b) the Net Cash Proceeds from such
transfer, conveyance, sale or other disposition are applied in accordance with
the covenant described above under the caption "-- Asset Sales," and (ii) will
not permit any Wholly Owned Subsidiary of the Company to issue any of its Equity
Interests (other than, if necessary, shares of its Capital Stock constituting
directors' qualifying shares) to any Person other than to the Company.
Limitations on Issuances of Guarantees of Indebtedness
The Indenture will provide that the Company will not permit any Subsidiary,
directly or indirectly, to Guarantee the payment of any Indebtedness other than
such Indebtedness represented by the Mortgage Notes and the Revolving Credit
Loan or secure the payment of any Indebtedness, other than with accounts
receivable, inventory (and the proceeds therefrom) and related collateral,
unless such Subsidiary simultaneously executes and delivers a supplemental
indenture to the Indenture providing for the (i) Guarantee of the payment of the
Mortgage Notes by such Subsidiary, which Guarantee shall be senior to or pari
passu with such Subsidiary's Guarantee of or pledge to secure such other
Indebtedness, and (ii) a security interest (other than on accounts receivable,
inventory (and the proceeds therefrom) and related collateral) securing such
Guarantee on the Mortgage Notes that ranks pari passu with the Liens securing
such Indebtedness. Notwithstanding the foregoing, any such guarantee by a
Subsidiary of the Mortgage Notes shall provide by its terms that it shall be
automatically and unconditionally released and discharged upon either (a) the
release or discharge of such Guarantee of such Indebtedness, except a discharge
by or as a result of payment under such Guarantee, or (b) any sale, exchange or
transfer, to any Person not an Affiliate of the Company, of all of the Company's
stock in, or all or substantially all the assets of, such Subsidiary, which
sale, exchange or transfer is made in compliance with the applicable provisions
of the Indenture.
Insurance
The Indenture will provide that, until the Mortgage Notes have been paid in
full, the Company will, and will cause its Subsidiaries to, maintain insurance
with responsible carriers against such risks and in such amounts as is
customarily carried by similar businesses with such deductibles, retentions,
self insured amounts and coinsurance provisions as are customarily carried by
similar businesses of similar size, including, without limitation, property and
casualty, and shall have provided insurance certificates evidencing such
insurance to the Trustee prior to the date of the Indenture and shall thereafter
provide evidence of such insurance within 30 days of the anniversary or renewal
date of each such policy, which certificate shall expressly state the expiration
date for each policy listed. Notwithstanding the foregoing, customary insurance
coverage for the purposes of the Indenture will include the following: (i)
workers' compensation insurance to the extent required to comply with all
applicable state, territorial, or United States laws and regulations or the laws
and regulations of any other applicable jurisdiction, (ii) comprehensive general
liability insurance with minimum limits of $1.0 million, (iii) umbrella or
excess liability insurance providing liability limits over and above the
foregoing insurance up to a minimum limit of $25.0 million, (iv) property
insurance protecting the property against such risks and hazards (other than
earthquakes) as are from time to time covered by an "all-risk" policy or a
property policy covering "special" causes of loss (such insurance shall provide
coverage in not less than the lesser of 120% of the outstanding principal amount
of Mortgage Notes plus accrued and unpaid interest and 100% of actual
replacement value (as determined at each policy renewal based on the F.W. Dodge
Building Index or some other recognized means) of any fixtures, equipment or
improvements and with a deductible no greater than $250,000 (other than flood
insurance, for which the deductible may be up to 10% of such replacement value
or such greater amount as is available on reasonably commercial terms)); and (v)
such insurance of any leased real or personal property as is required by the
terms of the applicable lease. All insurance required under the Indenture
(except worker's compensation) shall name the Trustee as an additional insured
or loss payee, as applicable. All such insurance policies will be issued by
carriers having an A.M. Best & Company, Inc. rating of A- or higher, or if such
carrier is not rated by A.M. Best & Company, Inc., having the financial
stability and size deemed appropriate by an opinion from a reputable insurance
broker.
64
<PAGE> 69
Further Assurances
The Indenture will provide that the Company will (and will cause each of
its Subsidiaries to) do, execute, acknowledge, deliver, record, re-record, file,
re-file, register and re-register, any and all such further acts, deeds,
conveyances, security agreements, mortgages, assignments, estoppel certificates,
financing statements and continuations thereof, termination statements, notices
of assignment, transfers, certificates, assurances and other instruments as may
be required from time to time or as the Trustee may reasonably request in order
(i) to carry out more effectively the purposes of the Collateral Documents, (ii)
to subject to the Liens created by any of the Collateral Documents any of the
properties, rights or interests required to be encumbered thereby, (iii) to
perfect and maintain the validity, effectiveness and priority of any of the
Collateral Documents and the Liens intended to be created thereby, and (iv) to
better assure, convey, grant, assign, transfer, preserve, protect and confirm to
the Trustee any of the rights granted or now or hereafter intended by the
parties thereto to be granted to the Trustee or under any other instrument
executed in connection therewith or granted by the Company under the Collateral
Documents or under any other instrument executed in connection therewith.
Reports
The Indenture will provide that, whether or not required by the rules and
regulations of the Commission, so long as any Mortgage Notes are outstanding,
the Company will furnish to the holders of Mortgage Notes (i) all quarterly and
annual financial information that would be required to be contained in a filing
with the Commission on Forms 10-Q and 10-K if the Company were required to file
such Forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the annual information
only, a report thereon by the Company's certified independent accountants and
(ii) all current reports that would be required to be filed with the Commission
on Form 8-K if the Company were required to file such reports. The Company also
shall include, in the case of such quarterly reports, the Contingent Interest
paid, the Contingent Interest Accrual amount and Consolidated Cash Flow with
respect to the most recently ended fiscal quarter of the Company, and in the
case of annual reports, the audited Contingent Interest paid, the Contingent
Interest Accrual amount and audited Consolidated Cash Flow for the most recently
ended fiscal year and for each of the fiscal quarters in such fiscal year. In
addition, whether or not required by the rules and regulations of the
Commission, the Company will file a copy of all such information and reports
with the Commission for public availability (unless the Commission will not
accept such a filing) and make such information available to securities analysts
and prospective investors upon request. The Company also will comply with the
other provisions of Sections 314(a) and 314(b) of the Trust Indenture Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture will provide that each of the following constitutes an Event
of Default: (i) default for 30 days in the payment when due of interest
(including Contingent Interest) on the Mortgage Notes, provided that payments of
Contingent Interest that are permitted to be deferred as provided in the
Indenture shall not become due for this purpose until such payment is required
to be made pursuant to the terms of the Indenture; (ii) default in payment when
due of the principal of or premium, if any, on the Mortgage Notes; (iii) failure
by the Company for 15 days after notice to observe or perform any covenant,
condition or agreement described under the captions "-- Repurchase at the Option
of Holders -- Change of Control," "-- Repurchase at the Option of
Holders -- Asset Sales," "-- Certain Covenants -- Restricted Payments" or
"-- Certain Covenants -- Incurrence of Indebtedness and Issuance of Preferred
Stock"; (iv) failure by the Company for 60 days after notice to comply with any
of its other agreements in the Indenture, the Collateral Documents or the
Mortgage Notes; (v) an "Event of Default" under and as defined in either of the
lease agreements relating to real property leased by the Company at the Freeport
Facility and the Maxwell Facility; (vi) default under any mortgage, indenture or
instrument under which there may be issued or by which there may be secured or
evidenced any Indebtedness for money borrowed by the Company or any of its
Subsidiaries (or the payment of which is guaranteed by the Company or any of its
Subsidiaries) whether such Indebtedness or guarantee now exists, or is created
after the date of the Indenture, which default (a) is caused by a failure to pay
principal of
65
<PAGE> 70
or premium, if any, or interest on such Indebtedness prior to the expiration of
the grace period provided in such Indebtedness on the date of such default (a
"Payment Default") or (b) results in the acceleration of such Indebtedness prior
to its express maturity and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such Indebtedness
under which there has been a Payment Default or the maturity of which has been
so accelerated, aggregates $5.0 million or more or is secured by a Lien that is
prior to the Lien in favor of the Trustee; (vii) any Collateral Document shall
be held to be unenforceable or otherwise invalid (except as expressly set forth
therein or in the Indenture) or the Lien created by any Collateral Document in
any asset or assets with a fair market value in excess of $5.0 million ceases to
be a valid and perfected Lien with the same priority as the Lien specified in
such Collateral Document, subject only to Permitted Liens; (viii) failure by the
Company or any of its Subsidiaries to pay final judgments aggregating in excess
of $5.0 million, which judgments are not paid, discharged or stayed for a period
of 60 days; and (ix) certain events of bankruptcy or insolvency with respect to
the Company or any of its Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the
holders of at least 25% in principal amount of the then outstanding Mortgage
Notes may declare the principal, premium, if any, interest (including all
Contingent Interest accrued or deferred) and any other monetary obligations on
all the Mortgage Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company, any Significant
Subsidiary or any group of Subsidiaries that, taken together, would constitute a
Significant Subsidiary, all outstanding Mortgage Notes will become due and
payable without further action or notice. Holders of the Mortgage Notes may not
enforce the Indenture or the Mortgage Notes except as provided in the Indenture.
Subject to certain limitations, holders of a majority in principal amount of the
then outstanding Mortgage Notes may direct the Trustee in its exercise of any
trust or power. The Trustee may withhold from holders of the Mortgage Notes
notice of any continuing Default or Event of Default (except a Default or Event
of Default relating to the payment of principal or interest) if it determines
that withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Mortgage Notes pursuant to
the optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Mortgage Notes. If an Event of Default occurs prior
to July 31, 1999 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Mortgage Notes, then the premium specified in
the Indenture shall also become immediately due and payable to the extent
permitted by law upon the acceleration of the Mortgage Notes.
The holders of a majority in aggregate principal amount of the Mortgage
Notes then outstanding by notice to the Trustee may on behalf of the holders of
all of the Mortgage Notes waive any existing Default or Event of Default and its
consequences under the Indenture except a continuing Default or Event of Default
in the payment of interest (including Contingent Interest) on, or the principal
of, the Mortgage Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Mortgage Notes or the Indenture or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each holder of Mortgage Notes by
accepting a Mortgage Note waives and releases all such liability. The waiver and
release are part of the consideration for issuance of the Mortgage Notes. Such
waiver may not be effective to waive liabilities under the federal securities
laws and it is the view of the Commission that such a waiver is against public
policy.
66
<PAGE> 71
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Mortgage Notes ("Legal
Defeasance") except for (i) the rights of holders of outstanding Mortgage Notes
to receive payments in respect of the principal of, and premium, if any, and
interest (including Contingent Interest, if any) on such Mortgage Notes when
such payments are due from the trust referred to below, (ii) the Company's
obligations with respect to the Mortgage Notes concerning issuing temporary
Mortgage Notes, registration of Mortgage Notes, mutilated, destroyed, lost or
stolen Mortgage Notes and the maintenance of an office or agency for payment and
money for security payments held in trust, (iii) the rights, powers, trusts,
duties and immunities of the Trustee, and the Company's obligations in
connection therewith and (iv) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Mortgage Notes. In the event Covenant Defeasance
occurs, certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Mortgage Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the holders of the Mortgage Notes, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest (including
the maximum amount payable as Contingent Interest, if any) due on the
outstanding Mortgage Notes on the stated maturity or on the applicable
redemption date, as the case may be, and the Company must specify whether the
Mortgage Notes are being defeased to maturity or to a particular redemption
date; (ii) in the case of Legal Defeasance, the Company shall have delivered to
the Trustee an opinion of counsel in the United States reasonably acceptable to
the Trustee confirming that (A) the Company has received from, or there has been
published by, the Internal Revenue Service a ruling or (B) since the date of the
Indenture, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel shall
confirm that, the holders of the outstanding Mortgage Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Legal
Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the
Company shall have delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that the holders of the
outstanding Mortgage Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be continuing on the
date of such deposit (other than a Default or Event of Default resulting from
the borrowing of funds to be applied to such deposit) or insofar as Events of
Default from bankruptcy or insolvency events are concerned, at any time in the
period ending on the 91st day after the date of deposit; (v) such Legal
Defeasance or Covenant Defeasance will not result in a breach or violation of,
or constitute a default under any material agreement or instrument (other than
the Indenture) to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound; (vi) the Company must
have delivered to the Trustee an opinion of counsel to the effect that after the
91st day following the deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally; (vii) the Company must deliver to the
Trustee an Officers' Certificate stating that the deposit was not made by the
Company with the intent of preferring the holders of Mortgage Notes over the
other creditors of the Company with the intent of defeating, hindering, delaying
or defrauding creditors of the Company or others; and (viii) the Company must
deliver to the Trustee an Officers' Certificate and an opinion of counsel, each
stating that all conditions precedent provided for relating to the Legal
Defeasance or the Covenant Defeasance have been complied with.
67
<PAGE> 72
TRANSFER AND EXCHANGE
A holder may transfer or exchange Mortgage Notes in accordance with the
Indenture. The Registrar and the Trustee may require a holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company is not required to transfer or exchange
any Mortgage Note selected for redemption. Also, the Company is not required to
transfer or exchange any Mortgage Note for a period of 15 days before a
selection of Mortgage Notes to be redeemed.
The registered holder of a Mortgage Note will be treated as the owner of it
for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture,
the Mortgage Notes and the Collateral Documents may be amended or supplemented
with the consent of the holders of at least a majority in principal amount of
the Mortgage Notes then outstanding (including consents obtained in connection
with a tender offer or exchange offer for Mortgage Notes), and any existing
default or compliance with any provision of the Indenture, the Mortgage Notes or
the Collateral Documents may be waived with the consent of the holders of a
majority in principal amount of the then outstanding Mortgage Notes (including
consents obtained in connection with a tender offer or exchange offer for
Mortgage Notes).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any Mortgage Notes held by a non-consenting holder): (i) reduce
the principal amount of Mortgage Notes whose holders must consent to an
amendment, supplement or waiver, (ii) reduce the principal of or change the
fixed maturity of any Mortgage Note or alter the provisions with respect to the
redemption of the Mortgage Notes (other than provisions relating to the
covenants described above under the caption "-- Repurchase at the Option of
Holders"), (iii) reduce the rate of or change the time for payment of interest
(including Contingent Interest) on any Mortgage Note, (iv) waive an Event of
Default in the payment of principal of or premium, if any, or interest
(including Contingent Interest) on the Mortgage Notes (except a rescission of
acceleration of the Mortgage Notes by the holders of at least a majority in
aggregate principal amount of the Mortgage Notes and a waiver of the payment
default that resulted from such acceleration), (v) make any Mortgage Note
payable in money other than that stated in the Mortgage Notes, (vi) make any
change in the provisions of the Indenture relating to waivers of past Defaults
or the rights of holders of Mortgage Notes to receive payments of principal of
or premium, if any, or interest (including Contingent Interest) on the Mortgage
Notes, (vii) waive a redemption payment with respect to any Mortgage Note (other
than a payment required by one of the covenants described above under the
caption "-- Repurchase at the Option of Holders"), (viii) directly or indirectly
release Liens on all or substantially all of the Collateral except in connection
with a permitted merger, consolidation or disposition of assets or (ix) make any
change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any holder of
Mortgage Notes, the Company and the Trustee may amend or supplement the
Indenture, the Mortgage Note or the Collateral Documents to cure any ambiguity,
defect or inconsistency, to provide for uncertificated Mortgage Notes in
addition to or in place of certificated Mortgage Notes, to provide for the
assumption of the Company's obligations to holders of Mortgage Notes in the case
of a merger or consolidation, to provide for certain amendments to the
Collateral Documents expressly called for therein in the case of a merger or
consolidation, to execute and deliver any documents necessary or appropriate to
release Liens on any Collateral as provided for in the Indenture, to make any
change that would provide any additional rights or benefits or Collateral to or
for the benefit of the holders of Mortgage Notes or that does not adversely
affect the legal rights under the Indenture and the Collateral Documents of any
such holder, or to comply with requirements of the Commission in order to effect
or maintain the qualification of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of
68
<PAGE> 73
any such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; however, if it acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue or resign.
The holders of a majority in principal amount of the then outstanding
Mortgage Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The Indenture provides that in case an Event of
Default shall occur (which shall not be cured), the Trustee will be required, in
the exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any holder of Mortgage Notes, unless such holder shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain copies of the Indenture
without charge by writing to American Rice, Inc., 16825 Northchase Drive, Suite
1600, Houston, Texas 77060, Attention: Vice President of Finance.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Accreted Value" means the price at which a Mortgage Note is originally
issued plus any accrued original issue discount.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person to the extent such
Indebtedness is not satisfied and such Lien released at the time of such
acquisition.
"Adjusted Fixed Charge Coverage Ratio" means with respect to any Person at
any time the Fixed Charge Coverage Ratio of such Person on such date adjusted as
follows: (a) Fixed Charges shall be adjusted to include (rather than exclude)
Contingent Interest, whether paid or accrued, and (b) the amount of Contingent
Interest on a pro forma basis shall equal the Contingent Interest accrued and
reflected in the financial statements for the last two Semiannual Periods with
respect to which Contingent Interest was accruable or payable.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"ARI-Vinafood" means American Rice-Vinafood Co., Ltd., a limited liability
company organized under the laws of the Socialist Republic of Vietnam.
69
<PAGE> 74
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets (including, without limitation, by way of a sale and leaseback) other
than sales in the ordinary course of business consistent with past practices or
sales of accounts receivable, inventory and related collateral to the extent
that the lender under the Revolving Credit Loan has a Lien on such assets
(including the receipt of proceeds of insurance paid on account of the loss of
or damages to any asset, other than inventory, and awards of compensation for
any asset taken by condemnation, eminent domain or similar proceeding), provided
that the sale, lease, conveyance or other disposition of all or substantially
all of the assets of the Company and its Subsidiaries taken as a whole will be
governed by the provisions of the Indenture described above under the caption
"-- Repurchase at the Option of Holders -- Change of Control" and/or the
provisions described above under the caption "-- Certain Covenants -- Merger,
Consolidation or Sale of Assets" and not by the provisions of the Asset Sale
covenant, and (ii) the issue or sale by the Company or any of its Subsidiaries
of Equity Interests of any of the Company's Subsidiaries, in the case of either
clause (i) or (ii), whether in a single transaction or a series of related
transactions (a) that have a fair market value in excess of $5.0 million or (b)
for net proceeds in excess of $5.0 million. Notwithstanding the foregoing: (i) a
transfer of assets by the Company to a Wholly Owned Subsidiary or by a Wholly
Owned Subsidiary to the Company or to another Wholly Owned Subsidiary, (ii) an
issuance of Equity Interests by a Wholly Owned Subsidiary to the Company or to
another Wholly Owned Subsidiary, and (iii) a Restricted Payment that is
permitted by the provisions described above under the caption "-- Certain
Covenants -- Restricted Payments" will not be deemed to be Asset Sales.
"Borrowing Base" means, as of any date, an amount equal to the sum of (a)
85% of the face amount of all accounts receivable owned by the Company and its
Subsidiaries as of such date that are not more than 90 days past due (or 90% of
such accounts receivable that are backed by letters of credit), (b) 75% of the
lower of the book value (calculated on a FIFO basis) or fair market value of all
inventory owned by the Company and its Subsidiaries as of such date and (c)
temporary overadvances in excess of the sum of (a) and (b) as permitted by the
lender under the Revolving Credit Loan, each of (a) and (b) calculated on a
consolidated basis and in accordance with GAAP. To the extent that information
is not available as to the amount of accounts receivable or inventory as of a
specific date, the Company may utilize the most recent available information for
purposes of calculating the Borrowing Base.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Expenditures" of a Person means expenditures (whether paid in cash
or accrued as a liability) by such Person or any of its Subsidiaries that, in
conformity with GAAP, are or would be included in "capital expenditures,"
"additions to property, plant or equipment" or comparable items in the
consolidated financial statements of such Person consistent with prior
accounting practices.
"Capital Stock" means (i) in the case of a corporation, corporate stock
(whether common or preferred), (ii) in the case of an association or business
entity, any and all shares, interests, participations, rights or other
equivalents (however designated) of corporate stock, (iii) in the case of a
partnership, partnership interests (whether general or limited) and (iv) any
other interest or participation that confers on a Person the right to receive a
share of the profits and losses of, or distributions of assets of, the issuing
Person.
"Carryover Amount" means (i) with respect to the fiscal year of the Company
ended March 31, 1995, zero dollars, and (ii) with respect to each succeeding
fiscal year of the Company, the amount by which (x) the sum of (1) the Carryover
Amount with respect to the immediately prior fiscal year of the Company plus (2)
$5.5 million exceeds (y) the amount of Capital Expenditures paid or incurred
during the fiscal year of the Company with respect to which such determination
is being made; provided, however, that for any fiscal year of the Company ending
on or after March 31, 1997 that immediately follows a fiscal year in which the
Consolidated Cash Flow of the Company exceeds $30.0 million, then the Carryover
Amount for such fiscal year shall be deemed to be the Carryover Amount for the
next preceding fiscal year of the Company that followed a fiscal year of the
Company in which such Consolidated Cash Flow was less than or equal to $30.0
million.
70
<PAGE> 75
"Cash Equivalents" means (i) U.S. dollars, (ii) securities issued or
directly and fully guaranteed or insured by the U.S. government or any agency or
instrumentality thereof having maturities of not more than six months from the
date of acquisition, (iii) certificates of deposit and eurodollar time deposits
with maturities of six months or less from the date of acquisition, bankers'
acceptances with maturities not exceeding six months and overnight bank
deposits, in each case with any domestic commercial bank having capital and
surplus in excess of $500 million and a Keefe Bank Watch Rating of "B" or
better, (iv) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (ii) and (iii) above
entered into with any financial institution meeting the qualifications specified
in clause (iii) above and (v) commercial paper having the highest rating
obtainable from Moody's Investors Service, Inc. or Standard & Poor's Corporation
and in each case maturing within six months after the date of acquisition.
"Collateral Documents" means, collectively, the Freeport Deed of Trust, the
Houston Deed of Trust, the Maxwell Deed of Trust, the Stuttgart Mortgage, the
Company Pledge Agreement, the ERLY Pledge Agreement, the Trademark Security
Agreement, the Intercreditor Agreement and any other pledges, agreements,
instruments, financing statements, filings or other documents that evidence, set
forth or limit the Lien of the Trustee in the Collateral (as such terms are
defined in the Indenture).
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary gain (or loss) plus any net gain (or loss) realized
in connection with an Asset Sale (to the extent such gains or losses were
included or deducted in computing such Consolidated Net Income), plus (ii)
provision for taxes based on income or profits of such Person and its
Subsidiaries for such period, to the extent that such provision for taxes was
included in computing such Consolidated Net Income, plus (iii) consolidated
interest expense of such Person and its Subsidiaries for such period, whether
paid or accrued and whether or not capitalized (including, without limitation,
amortization of original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest component
of all payments associated with Capital Lease Obligations, commissions,
discounts and other fees and charges incurred in respect of letter of credit or
bankers' acceptance financings, and net payments (if any) pursuant to Hedging
Obligations), to the extent that any such expense was deducted in computing such
Consolidated Net Income, plus (iv) depreciation, amortization (including
amortization of goodwill and other intangibles but excluding amortization of
prepaid cash expenses that were paid in a prior period) and other non-cash
charges (excluding any such non-cash charge to the extent that it represents an
accrual of or reserve for cash charges in any future period or amortization of a
prepaid cash expense that was paid in a prior period) of such Person and its
Subsidiaries for such period to the extent that such depreciation, amortization
and other non-cash charges were deducted in computing such Consolidated Net
Income, plus (v) for purposes of making calculations with respect to Contingent
Interest only, fees related to management services pursuant to the Management
Agreement, plus (vi) interest income and other income and expense, in each case,
on a consolidated basis and determined in accordance with GAAP. Notwithstanding
the foregoing, the provision for taxes on the income or profits of, and the
depreciation and amortization and other non-cash charges of, a Subsidiary of the
referent Person shall be added to Consolidated Net Income to compute
Consolidated Cash Flow only to the extent (and in the same proportion) that the
Net Income of such Subsidiary was included in calculating the Consolidated Net
Income of such Person and only if a corresponding amount would be permitted at
the date of determination to be dividended to the Company by such Subsidiary
without prior approval (that has not been obtained), pursuant to the terms of
its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to that Subsidiary or
its stockholders.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided
that (i) the Net Income (but not loss) of any Person that is not a Subsidiary or
that is accounted for by the equity method of accounting shall be included only
to the extent of the amount of dividends or distributions paid in cash to the
referent Person, (ii) the Net Income of any Subsidiary shall be excluded to the
extent that the declaration or payment of dividends or similar distributions by
that Subsidiary of that Net Income is not at the date of determination permitted
without any prior governmental approval (which has not been obtained) or,
directly or indirectly, by operation of the terms of its charter or any
71
<PAGE> 76
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Subsidiary or its stockholders, (iii) the Net
Income of any Subsidiary shall be excluded to the extent and in proportion to
the outstanding Voting Stock of such Subsidiary not held of record by such
referent Person, (iv) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded, (v) the cumulative effect of a change in accounting principles
shall be excluded, and (vi) the Net Income of ARI-Vinafood shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the consolidated equity of such Person and its consolidated Subsidiaries as of
such date less (x) all write-ups (other than write-ups resulting from foreign
currency translations and write-ups of tangible assets of a going concern
business made within 12 months after the acquisition of such business)
subsequent to the date of the Indenture in the book value of any asset owned by
such Person or a consolidated Subsidiary of such Person and (y) all investments
as of such date in unconsolidated Subsidiaries and in Persons that are not
Subsidiaries (except, in each case, Permitted Investments).
"Contingent Interest" means Base Contingent Interest on the Mortgage Notes
then accrued and any Base Contingent Interest previously accrued and the payment
of which has been permitted to be deferred.
"Contingent Interest Accrual" means, at any time, the total amount of
Contingent Interest on the Mortgage Notes accrued and unpaid through and as of
such time.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture, (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election or (iii) was nominated for election, elected or appointed
to such Board to fill a vacancy caused by the death of a member of the Board of
Directors.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the holder thereof, in whole or in part, on or prior to the date
that is one year after the Maturity Date.
"ERLY" means ERLY Industries Inc., a California corporation.
"ERLY Intercompany Notes" means collectively (i) that certain intercompany
note in favor of the Company, dated the date of the Indenture, in aggregate
principal amount of $10.5 million, bearing interest at the rate of 15% per annum
and maturing one year and one day prior to the Maturity Date, which ranks senior
in right of payment to all existing and future subordinated Indebtedness and
pari passu in right of payment with all future senior Indebtedness of ERLY,
together with that certain Warrant Certificate, in the form attached to such
note, issued to the Company and exercisable into 7 1/2% of the then issued and
outstanding voting common stock of ERLY (the "15% ERLY Intercompany Note"), and
(ii) that certain Promissory Note in favor of the Company, dated May 25, 1993,
as amended as of the date of the Indenture, in aggregate principal amount of
$10.0 million, bearing interest at the rate of 6% per annum and maturing one day
after the Maturity Date (the "6% ERLY Intercompany Note").
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Fixed Charges" means, with respect to any Person for any period, the sum
of (i) the consolidated interest expense (excluding, solely for purposes of this
definition, Contingent Interest paid or accrued) of such Person and its
Subsidiaries (in proportion to the Company's ownership interest in each such
Subsidiary) for such period, whether paid or accrued (including, without
limitation, amortization of original issue discount, non-cash interest payments,
the interest component of any deferred payment obligations, the interest
component of all payments associated with Capital Lease Obligations,
commissions, discounts and other fees and charges incurred in respect of letters
of credit or bankers' acceptance financings, and net payments, if any, pursuant
to Hedging Obligations, but net of any amounts included in interest expense
related to the
72
<PAGE> 77
amortization of financing costs) and (ii) the consolidated interest expense of
such Person and its Subsidiaries (in proportion to the Company's ownership
interest in each such Subsidiary) that was capitalized during such period, and
(iii) any interest expense on Indebtedness of another Person that is Guaranteed
by such Person or one of its Subsidiaries or secured by a Lien on assets of such
Person or one of its Subsidiaries to the extent of such Guarantee or Lien
(whether or not such Guarantee or Lien is called upon), and (iv) the product of
(a) all cash dividend payments (and non-cash dividend payments in the case of a
Person that is a Subsidiary) actually declared on any series of preferred stock
of such Person, times (b) a fraction, the numerator of which is one and the
denominator of which is one minus the then current combined federal, state and
local statutory tax rate of such Person, expressed as a decimal, in each case,
on a consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means, with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
Company or any of its Subsidiaries incurs, assumes, Guarantees or redeems any
Indebtedness (other than revolving credit borrowings and scheduled payments) or
issues or redeems preferred stock subsequent to the commencement of the period
for which the Fixed Charge Coverage Ratio is being calculated but prior to the
date on which the event for which the calculation of the Fixed Charge Coverage
Ratio is made (the "Calculation Date"), then the Fixed Charge Coverage Ratio
shall be calculated giving pro forma effect to such incurrence, assumption,
Guarantee or redemption of Indebtedness, or such issuance or redemption of
preferred stock, as if the same had occurred at the beginning of the applicable
four-quarter reference period. For purposes of making the computation referred
to above, (i) acquisitions that have been made by the Company or any of its
Subsidiaries, including through mergers or consolidations and including any
related financing transactions, during the four-quarter reference period or
subsequent to such reference period and on or prior to the Calculation Date
shall be deemed to have occurred on the first day of the four-quarter reference
period, and (ii) the Consolidated Cash Flow attributable to discontinued
operations, as determined in accordance with GAAP, and operations or businesses
disposed of prior to the Calculation Date, shall be excluded, and (iii) the
Fixed Charges attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, but only to the extent that the obligations
giving rise to such Fixed Charges will not be obligations of the referent Person
or any of its Subsidiaries following the Calculation Date.
"Fixed Interest" means the interest payable with respect to any principal
amount of Mortgage Notes in an amount equal to 13% of such principal amount.
"Freeport IRBs" means those certain $13,300,000 Variable Rate Demand Marine
Terminal Revenue Bonds, Series 1985 (American Rice, Inc. Project) issued by
Brazos Harbor Industrial Development Corporation on December 16, 1985.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing indebtedness (other than letters of credit and
Hedging
73
<PAGE> 78
Obligations) would appear as a liability upon a balance sheet of such Person
prepared in accordance with GAAP, as well as all indebtedness of others secured
by a Lien on any asset of such Person (whether or not such indebtedness is
assumed by such Person) and, to the extent not otherwise included, the Guarantee
by such Person of any indebtedness of any other Person; provided that such
indebtedness shall not include indebtedness represented by standby letters of
credit to the extent that a Person's payment obligation in respect of such
standby letter of credit secures an underlying obligation that otherwise is
included as indebtedness of such Person or its Subsidiaries.
"Indebtedness to Cash Flow Ratio" means, with respect to any Person, the
ratio of (a) the Indebtedness of such Person and its Subsidiaries as of the end
of the most recently ended fiscal quarter, plus the amount of any Indebtedness
incurred subsequent to the end of such fiscal quarter, to (b) such Person's
Consolidated Cash Flow for the most recently ended four full fiscal quarters for
which internal financial statements are available immediately preceding the date
on which such event for which such calculation is being made shall occur (the
"Measurement Period"); provided, however, that (i) in making such computation,
Indebtedness shall include the total amount of funds outstanding and available
under any revolving credit facility and (ii) in the event that the Company or
any of its Subsidiaries consummates a material acquisition or an Asset Sale or
other disposition of material assets subsequent to the commencement of the
Measurement Period but prior to the event for which the calculation of the
Indebtedness to Cash Flow Ratio is made, then the Indebtedness to Cash Flow
Ratio shall be calculated giving pro forma effect to such material acquisition
or Asset Sale or other disposition of material assets, as if the same had
occurred at the beginning of the applicable period.
"Intercreditor Agreement" means that certain Intercreditor Agreement
entered into by and between the Trustee and the lender under the Revolving
Credit Loan on or before the date of the Indenture, as thereafter amended,
supplemented, modified, or replaced (including such agreement entered into by
the lender under an agreement constituting Permitted Refinancing Indebtedness
with respect to the Revolving Credit Loan), in each case substantially in the
form attached to the Indenture.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities and all other items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP;
provided that an acquisition of assets, Equity Interests or other securities by
the Company for consideration consisting of common equity securities of the
Company shall not be deemed to be an Investment.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Management Agreement" means that certain Management Agreement dated as of
May 25, 1993 by and between ERLY and the Company.
"Maturity Date" means July 31, 2002.
"Net Cash Proceeds" means the Net Proceeds of any Asset Sale received in
the form of cash or Cash Equivalents.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (or
loss), together with any related provision for taxes on such gain (or loss),
realized in connection with (a) any Asset Sale (including, without limitation,
dispositions pursuant to sale and leaseback transactions) or (b) the disposition
of any securities by such Person or any of its Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Subsidiaries and
(ii) any extraordinary or
74
<PAGE> 79
nonrecurring gain (or loss), together with any related provision for taxes on
such extraordinary or nonrecurring gain (or loss).
"Net Proceeds" means the aggregate cash and non-cash consideration received
by the Company or any of its Subsidiaries in respect of any Asset Sale,
including, without limitation, any liabilities (as shown on the Company's or
such Subsidiary's most recent balance sheet or in the notes thereto) of the
Company or any Subsidiary assumed by the transferee in such Asset Sale or
otherwise satisfied in connection with such Asset Sale, net of (i) direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), (ii) amounts applied to the repayment of Indebtedness (other than
the Mortgage Notes), and the value of the Indebtedness assumed by the transferee
in such Asset Sale, in each case, to the extent required by the terms of
Indebtedness secured by a Lien on the asset or assets that were the subject of
such Asset Sale (whether or not, in the case of repayment of Indebtedness
incurred under the Revolving Credit Loan to the extent of the proceeds of assets
not constituting Collateral, such assets are re-lent) and (iii) any reserve for
adjustment in respect of the sale price of such asset or assets established in
accordance with GAAP.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Subsidiaries (other than ARI-Vinafood) (a) provides credit
support of any kind (including any undertaking, agreement or instrument that
would constitute Indebtedness of the Company or any of its Subsidiaries), or
(b) is directly or indirectly liable (as a guarantor or otherwise) and (ii) no
default with respect to which (including any rights that the holders thereof may
have to take enforcement action against ARI-Vinafood) would permit (upon notice,
lapse of time or both) any holder of any other Indebtedness of the Company or
any of its Subsidiaries (other than ARI-Vinafood) to declare a default on such
other Indebtedness or cause the payment thereof to be accelerated or payable
prior to its stated maturity.
"Officers' Certificate" means a certificate signed on behalf of the Company
by two Officers of the Company, one of whom must be the principal executive
officer, the principal financial officer, the treasurer or the principal
accounting officer of the Company.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Operating Lease Obligations" means a Person's operating leases determined
in accordance with GAAP.
"Permitted Investments" means (i) any Investments in the Company or in a
Wholly Owned Subsidiary of the Company that are evidenced by Capital Stock or
Subsidiary Intercompany Notes which are pledged to the Trustee as Collateral for
the Mortgage Notes; (ii) any Investments in Cash Equivalents; (iii) any
Investments by the Company or any Subsidiary of the Company in a Person engaged
in a Related Business that are evidenced by Capital Stock or Subsidiary
Intercompany Notes that are pledged to the Trustee as Collateral for the
Mortgage Notes, if as a result of such Investment (a) such Person becomes a
Wholly Owned Subsidiary of the Company that is engaged in a Related Business or
(b) such Person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is liquidated into,
the Company or a Wholly Owned Subsidiary of the Company that is engaged in a
Related Business; (iv) Restricted Investments made as a result of the receipt of
non-cash consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption "-- Repurchase at
the Option of Holders -- Asset Sales"; and (v) other Investments in any Person
that do not exceed $1.0 million in the aggregate at any time outstanding.
"Permitted Liens" means (i) Liens securing Indebtedness pursuant to the
Revolving Credit Loan for working capital purposes and other corporate purposes
not prohibited by the Revolving Credit Loan, in an aggregate principal amount
not to exceed the Borrowing Base, plus interest, fees, charges, costs and
expenses pursuant to the Revolving Credit Loan, provided that any Liens on
Collateral in favor of the Revolving Credit Lender shall be junior and
subordinate to the Liens in favor of the Trustee under the Collateral Documents
and shall be subject to the Intercreditor Agreement; (ii) Liens in favor of the
Company or created in favor of
75
<PAGE> 80
the Trustee pursuant to the Indenture or the Collateral Documents; (iii) Liens
on property of a Person existing at the time such Person is merged into or
consolidated with the Company or any Subsidiary of the Company; provided that
such Liens were in existence prior to the consummation and not made in
contemplation of such merger or consolidation and do not extend to any assets
other than those of the Person merged into or consolidated with the Company;
(iv) Liens on property existing at the time of acquisition thereof by the
Company or any Subsidiary of the Company, provided that such Liens were in
existence prior to the contemplation of such acquisition; (v) Liens to secure
the performance of statutory obligations, surety or appeal bonds, performance
bonds or other obligations of a like nature incurred in the ordinary course of
business; (vi) Liens existing on the date of the Indenture, including renewals
and extensions thereof in connection with Permitted Refinancing Indebtedness
(other than Liens securing Indebtedness to be repaid with the proceeds from the
sale of the Mortgage Notes and Liens securing the Revolving Credit Loan),
provided that any Liens on Collateral in favor of the Lenders under such
Permitted Refinancing Indebtedness shall be junior and subordinate to the Liens
in favor of the Trustee under the Collateral Documents; (vii) Liens on the
Collateral securing obligations in respect of the Indenture and the Mortgage
Notes; (viii) ground leases under which the Company is the lessee in respect of
the real property on which facilities owned or leased by the Company or any of
its Subsidiaries are located; (ix) (1) Liens for taxes, assessments or
governmental charges or claims or (2) statutory Liens of landlords, carriers,
warehousemen, mechanics, suppliers, materialmen and repairmen or other similar
Liens arising in the ordinary course of business, in the case of each of (1) and
(2), with respect to amounts that either (A) are not yet delinquent or (B) are
being contested in good faith by appropriate proceedings as to which appropriate
reserves or other provisions have been made in accordance with GAAP; (x)
easements, rights-of-way, restrictions, covenants, mineral reservations, minor
defects or irregularities in title and other similar charges or encumbrances
which do not interfere in any material respect with the ordinary conduct of
business of the Company and its Subsidiaries; (xi) Liens to secure Indebtedness
(including Capital Lease Obligations) permitted by clause (iv) of the second
paragraph of the covenant entitled "Incurrence of Indebtedness and Issuance of
Preferred Stock" covering only the assets acquired with such Indebtedness; (xii)
Liens on the Freeport Facility securing the Freeport IRBs and any letter of
credit obtained by the Company if and to the extent required for the Company to
remarket the Freeport IRBs; and (xiii) Liens incurred in the ordinary course of
business of the Company or any Subsidiary of the Company with respect to
obligations that do not exceed $2.5 million at any one time outstanding and that
(a) are not incurred in connection with the borrowing of money or the obtaining
of advances or credit (other than trade credit in the ordinary course of
business) and (b) do not in the aggregate materially detract from the value of
the property or materially impair the use thereof in the operation of business
by the Company or such Subsidiary.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or any of its Subsidiaries; provided that: (i) the
principal amount of such Permitted Refinancing Indebtedness does not exceed (a)
the principal amount of the Indebtedness so extended, refinanced, renewed,
replaced, defeased or refunded, (b) if such Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded was issued at an original
issue discount, the original issue price, plus amortization of the original
issue discount to the time the Permitted Refinancing Debt is incurred, or (c) if
such Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded is Indebtedness represented by the Revolving Credit Loan and such
Permitted Refinancing Indebtedness also is a revolving credit facility, the
amount of the Borrowing Base (in each case, plus interest, fees, charges, costs
and the amount of reasonable expenses incurred in connection therewith); (ii)
such Permitted Refinancing Indebtedness does not require payments of principal
prior to the final maturity date of, and has a Weighted Average Life to Maturity
equal to or greater than the Weighted Average Life to Maturity of, the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (iii) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the
Mortgage Notes, such Permitted Refinancing Indebtedness has a final maturity
date later than the final maturity date of, and is subordinated in right of
payment to, the Mortgage Notes on terms at least as favorable to the holders of
Mortgage Notes as those contained in the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (iv) such Indebtedness is incurred either by the
76
<PAGE> 81
Company or by the Subsidiary who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; and (v) any
Permitted Refinancing Indebtedness relating to the Revolving Credit Loan will be
subject to the Intercreditor Agreement.
"Person" means any individual, corporation, partnership, joint venture,
incorporated or unincorporated association, joint stock company, trust,
unincorporated organization or government or other agency or political
subdivision thereof or other entity of any kind.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of such
Person's preferred or preference stock, whether outstanding on the date hereof
or issued after the date of the Indenture, and including, without limitation,
all classes and series of preferred or preference stock of such Person.
"Related Business" means the business of purchasing, processing, bagging,
transporting, trading and marketing agricultural products and such business
activities as are incidental or related thereto.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Semiannual Period" means each period that begins on January 1 and ends on
the next succeeding June 30 or each period that begins on July 1 and ends on the
next succeeding December 31.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"Subsidiary Intercompany Notes" means the intercompany promissory notes
issued by the Company's Subsidiaries in favor of the Company to evidence loans
by the Company, in each case in the form attached to the Company Pledge
Agreement.
"Tax Sharing Agreement" means that certain Tax Agreement dated May 25, 1993
by and between ERLY and the Company.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person or by such
Person and one or more Wholly Owned Subsidiaries of such Person.
77
<PAGE> 82
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following is a summary of provisions of the Company's other debt that
will remain outstanding after application of the proceeds of this Offering. This
summary provides only the significant terms of each Indebtedness and is
qualified in its entirety by the actual terms and conditions of each individual
debt instrument. Such debt instruments are available for inspection at the
Company's executive offices.
REVOLVING CREDIT LOAN
The Revolving Credit Loan, amended as of June 30, 1995 and to be amended
concurrently with the issuance of the Mortgage Notes, provides for loans to the
Company of up to $47.5 million, subject to availability based on a borrowing
base of 85% of eligible accounts receivable, 90% of accounts receivable backed
by acceptable letters of credit from customers, and 70% of eligible inventory.
Available collateral will be limited to $2.0 million for Comet Rice of Puerto
Rico, Inc. and $2.0 million for CVI and will be reduced by 50% plus freight and
delivery costs in the case of documentary letters of credit used to purchase
eligible inventory by the Company and 100% in the case of standby and other
documentary letters of credit issued for obligations of the Company. In addition
to interest, an annual fee of $120,000 will be payable plus 0.5% on the amount
of the difference between the average usage of the line and 80% of the $47.5
million credit facility limit. The term of the Revolving Credit Loan is from
June 30, 1995 to May 24, 1996, and from year-to-year thereafter, unless sooner
terminated. Termination of the Revolving Credit Loan during the initial term of
the Revolving Credit Loan or any renewal thereof requires the payment of a
$475,000 fee, unless the termination occurs on May 24, 1996 or on any subsequent
renewal date. Payments under the Tax Sharing Agreement to ERLY, previously
prohibited, now are allowed to the extent ARI has a current liability computed
on a separate return basis, subject to permissive offsets for amounts due under
the 15% ERLY Intercompany Note.
Borrowings under the Revolving Credit Loan are secured by a first priority
lien on the accounts receivable, inventory (and proceeds therefrom) and related
collateral, other assets of the Company that are not Collateral and by Liens
that are junior to Liens on the Collateral, guaranteed on a senior basis by
certain of the Company's Subsidiaries, which guarantees may be secured by such
Subsidiaries' accounts receivable, inventory (and proceeds therefrom) and
related collateral.
The funds borrowed under the Revolving Credit Loan bear interest, as of
June 1, 1995, at the prime rate of interest plus 0.5%. The Revolving Credit Loan
has an option to borrow at the Eurodollar Rate (as defined in the Revolving
Credit Loan) plus 3.0%.
Covenants and provisions contained in the Revolving Credit Loan restrict,
with certain exceptions, among other things, the ability of the Company and its
Subsidiaries: (i) to prepay the Mortgage Notes, except pursuant to the mandatory
prepayment provisions as in effect on the Closing Date, (ii) to incur additional
indebtedness, (iii) to engage in mergers, acquisitions, divestitures, sales and
leasebacks, changes of business or creation of subsidiaries or joint ventures,
(iv) to sell assets outside the ordinary course of business, (v) to guarantee or
invest in, or make loans or advances to, other persons or entities, including
Subsidiaries, (vi) to engage in certain transactions with affiliates and holders
of equity interests, (vii) with respect to the Company only, to declare or pay
dividends or make other distributions with respect to equity interests and
(viii) to modify, amend or supplement the Mortgage Notes, the Indenture or any
of the Collateral Documents without the Revolving Credit Lender's prior written
consent. The Revolving Credit Loan also requires the Company to maintain
specified financial ratios.
Events of default under the Revolving Credit Loan include, among other
things: (i) any failure of the Company to pay principal thereunder when due, or
to pay interest or other amounts when due, (ii) default under certain other
indebtedness (including capitalized leases) or agreements, (iii) breach of
certain covenants and agreements contained in the Revolving Credit Loan by the
Company, (iv) material inaccuracy of any representation or warranty given by the
Company in the Revolving Credit Loan, (v) the continuance of a default by the
Company in the performance of or compliance with other covenants and agreements,
(vi) certain changes of control, including a Change of Control, and acts of
bankruptcy, insolvency or dissolution and (vii) the occurrence of an event
constituting a material adverse change.
78
<PAGE> 83
FREEPORT IRBS
In connection with the development of the Company's rice processing
facilities in Freeport, Texas, certain Industrial Development Variable Rate
Demand Marine Terminal Revenue Bonds (the "Freeport IRBs") were issued on
December 16, 1985 pursuant to a trust indenture by and between the Brazos Harbor
Industrial Development Corporation (the "Corporation") and Texas Commerce Bank
National Association, as Trustee (the "Trustee"), as amended by that certain
First Supplemental Trust Indenture by and between the same parties
(collectively, the "IRB Indenture"). The proceeds of the Freeport IRBs were
loaned to ARI pursuant to a loan agreement by and between the Corporation and
ARI, as amended. The Freeport IRBs are secured by a deed of trust on the
Freeport Facility and other collateral and by payments to be made under an
irrevocable letter of credit (the "Letter of Credit") issued by the New York
branch of the Cooperative Centrale Raiffeisen-Boerenleenbank B.A. ("Rabobank").
Pursuant to the IRB Indenture, the Freeport IRBs were mandatorily tendered prior
to the expiration of the Letter of Credit because no alternate letter of credit
was delivered to replace the Letter of Credit prior to its expiration. The
Company purchased the outstanding Freeport IRBs using funds drawn under the
Letter of Credit, upon which the Freeport IRBs became "Pledged Bonds" purchased
on ARI's account. Such Pledged Bonds were registered in ARI's name, pledged and
delivered to Rabobank and then released at the time of the Acquisition to be
pledged to Chase Manhattan Bank to secure the Term Loans, which are being repaid
with the proceeds from the sale of the Mortgage Notes. The Company continues to
pay debt service on the Freeport IRBs as though they were held by a third party
and, if and when the Company obtains a new letter of credit, the Company may
remarket the Freeport IRBs.
ARI-VINAFOOD SHORT-TERM NOTES
ARI-Vinafood recently has begun utilizing short-term working capital loans
to finance ARI-Vinafood's purchases of rough rice from Vietnamese rice farmers.
At June 30, 1995, ARI-Vinafood had obtained such loans from foreign lenders in
the amount of $3.8 million. These notes are unsecured and are payable in part in
U.S. dollars and in part in Vietnamese dong.
79
<PAGE> 84
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain of the expected federal
income tax consequences applicable to holders of the Mortgage Notes who purchase
the Mortgage Notes pursuant to the Offering. In the opinion of Vial, Hamilton,
Koch & Knox, L.L.P., tax counsel to the Company, the material federal income tax
consequences to original purchasers expected to result from the purchase,
ownership and sale or other taxable disposition of the Mortgage Notes, under
currently applicable law, are as described herein. Such opinion is based upon
the current provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), applicable Treasury regulations, judicial authority and administrative
rulings and practice. There can be no assurance that the Internal Revenue
Service (the "IRS") will not take a contrary view, and no ruling from the IRS
has been or will be sought. Legislative, judicial or administrative changes or
interpretations may occur that could alter or modify the statements and
conclusions set forth herein. Any such changes or interpretations may or may not
be retroactive and could affect the tax consequences to the Mortgage Note
holders.
The following summary is for general information only. The tax treatment of
a Mortgage Note holder may vary depending upon its particular situation. Certain
Mortgage Note holders (including insurance companies, tax-exempt organizations,
financial institutions or broker-dealers, foreign corporations and persons who
are not citizens or residents of the United States) may be subject to special
rules not discussed below.
On December 16, 1994, the IRS issued proposed regulations (the "Proposed
Contingent Payment Regulations") regarding the inclusion of original issue
discount in income by holders of debt instruments which provide for contingent
payments. The Proposed Contingent Payment Regulations repealed and superseded
the prior proposed regulations relating to debt instruments providing for
contingent payments. The Proposed Contingent Payment Regulations will be
effective 60 days following the promulgation of such regulations in final form.
Since the prior proposed regulations never came into effect and the Proposed
Contingent Payment Regulations only apply prospectively, there is no final or
proposed treasury regulation that is currently applicable to contingent debt
obligations (such as the Mortgage Notes). In the absence of any regulatory
guidance, counsel has advised the Company that contingent debt obligations
issued prior to the effective date of the final treasury regulations will be
treated under general principles of tax law, and the following discussion is
based on the assumption that such treatment is respected. However, there can be
no assurance that final treasury regulations regarding contingent payments will
not differ materially from the approach adopted by the Company, or that the
Proposed Contingent Payment Regulations will not apply retroactively.
Accordingly, the ultimate federal income tax treatment of the Mortgage Notes may
differ significantly from that described herein. EACH PROSPECTIVE PURCHASER OF
THE MORTGAGE NOTES IS URGED TO CONSULT ITS TAX ADVISOR WITH RESPECT TO THE
APPLICATION OF THE FINAL REGULATIONS AND THE PROPOSED CONTINGENT PAYMENT
REGULATIONS (OR SUBSEQUENT VERSIONS THEREOF) TO AN INVESTMENT IN THE MORTGAGE
NOTES.
TAX CHARACTERIZATION OF THE MORTGAGE NOTES
The Mortgage Notes provide for both Fixed Interest payments and Contingent
Interest payments for certain periods based on the Company's operating results
and calculated as a percentage of the Company's Consolidated Cash Flow. The
Mortgage Notes have legal and other economic terms typically associated with
indebtedness and have been intended to create a debtor-creditor relationship
between the Company and the Mortgage Note holders. Based upon certain
representations by the Company with respect to the level of Contingent Interest
payments expected to be made and current market yields on comparable publicly
traded indebtedness, and after review of the terms of the Mortgage Notes and
current legal precedent and authorities, counsel to the Company has advised the
Company to treat the Mortgage Notes as indebtedness for federal income tax
purposes. Such advice, however, is not binding on the IRS (or the courts), and
there can be no assurance that the IRS would not argue (or that a court would
not hold) that the Mortgage Notes should be characterized, in whole or in part,
as equity for federal income tax purposes. Nevertheless, it is counsel's opinion
that, if litigated, the Company's treatment of the Mortgage Notes as
indebtedness for federal income tax purposes should be upheld. If the Company's
treatment of the Mortgage Notes were not upheld, some or all of the interest
payments on the Mortgage Notes would be recharacterized, and the Mortgage Note
holders
80
<PAGE> 85
may face other adverse tax consequences not described herein. Each prospective
purchaser of the Mortgage Notes is urged to consult its tax advisor with respect
to the potential impact of the recharacterization of the Mortgage Notes. The
following discussion assumes that the Mortgage Notes are properly treated as
indebtedness.
STATED INTEREST AND ORIGINAL ISSUE DISCOUNT
Fixed Interest of 13% per annum on the Mortgage Notes will be taken into
income as interest by the Mortgage Note holders in accordance with their regular
method of accounting for federal income tax purposes. The Mortgage Notes will be
issued with original issue discount ("OID") in an amount equal to the excess of
the "stated redemption price at maturity" over the "issue price" of the Mortgage
Notes.
Under the Code and the Treasury regulations dealing with OID, Mortgage
Notes with an "issue price" (generally, the first price paid for a substantial
amount of the Mortgage Notes) that is less than their "stated redemption price"
at maturity (the sum of all payments to be made on the Mortgage Notes other than
"qualified stated interest") will be issued with original issue discount if such
difference is at least 0.25% of the stated redemption price at maturity
multiplied by the number of complete years to maturity (the "de minimus
amount"). The term "qualified stated interest" means stated interest that is
unconditionally payable in cash or in property (other than debt instruments of
the issuer) at least annually at a single fixed rate or, subject to certain
conditions, based on one or more interest indices. Interest is payable at a
single fixed rate only if the rate appropriately takes into account the length
of the interval between payments. Because the issue price of the Mortgage Notes
will be less than their stated redemption price at maturity by more than the de
minimus amount, holders of Mortgage Notes will be required to include OID in
income in accordance with the rules set forth below.
Holders of Mortgage Notes with a maturity upon issuance of more than one
year must, in general, include OID in income in advance of the receipt of some
or all of the related cash payments. The amount of OID includible in income by
an initial holder of Mortgage Notes is the sum of the "daily portions" of OID
with respect to such Mortgage Notes for each day during the taxable year or
portion of the taxable year in which such holder held such Mortgage Notes
("accrued OID"). The daily portion is determined by allocating to each day in
any "accrual period" a pro rata portion of the OID allocable to that accrual
period. The "accrual period" for the Mortgage Notes may be of any length and may
vary in length over the term of the Mortgage Notes, provided that each accrual
period is no longer than one year and each scheduled payment of principal or
interest occurs on the first day or the final day of an accrual period. The
amount of OID allocable to any accrual period is an amount equal to the excess,
if any, of (a) the product of the adjusted issue price of the Mortgage Notes at
the beginning of such accrual period and its yield to maturity (determined on
the basis of compounding at the close of each accrual period and properly
adjusted for the length of the accrual period) over (b) the sum of any qualified
stated interest allocable to the accrual period. OID allocable to a final
accrual period is the difference between the amount payable at maturity (other
than a payment of qualified stated interest) and the adjusted issue price at the
beginning of the final accrual period. Special rules will apply for calculating
OID for an initial short accrual period. The "adjusted issue price" of the
Mortgage Notes at the beginning of any accrual period is equal to its issue
price increased by the accrued OID for each prior accrual period (determined
without regard to the amortization of any acquisition or bond premium) and
reduced by any payments made on such Mortgage Notes (other than qualified stated
interest) on or before the first day of the accrual period. Under these rules,
the holders of the Mortgage Notes will have to include in income increasingly
greater amounts of OID in successive accrual periods. The Company is required to
provide information returns stating the amount of OID accrued on the Mortgage
Notes held of record by persons other than corporations and other exempt
holders.
Any holders of the Mortgage Notes may elect to treat all interest on such
Mortgage Notes as OID and calculate the amount includible in gross income under
the constant yield method described above. For the purposes of this election,
interest includes stated interest, acquisition discount, OID, de minimis OID,
market discount, de minimis market discount and unstated interest, all as
adjusted by any amortizable bond premium or acquisition premium. The election is
to be made for the taxable year in which the holder acquired the Mortgage Notes,
and may not be revoked without the consent of the IRS. Holders of the Mortgage
Notes should consult with their own tax advisors about this election.
81
<PAGE> 86
CONTINGENT PAYMENTS ON THE MORTGAGE NOTES
Because the Mortgage Notes provide for certain Contingent Interest
payments, if the Proposed Contingent Payment Regulations were to apply, the
Mortgage Note holders would be required to include certain amounts in ordinary
income as interest for federal income tax purposes before receiving the actual
cash payment attributable thereto. However, because the Proposed Contingent
Payment Regulations by their terms will not apply to the Mortgage Notes, counsel
has advised the Company to apply general principles of tax law to analyze the
tax consequences of the Contingent Interest payment to be made on the Mortgage
Notes.
All Contingent Interest payments will be treated as interest on the
Mortgage Notes and will be included in income by the Mortgage Note holders when
the amount of each payment becomes fixed. It appears that each Contingent
Interest payment will be treated as fixed on the last day of the Company's
fiscal period with respect to which such payment is calculated, even though the
exact Consolidated Cash Flow calculation would not yet be complete and the
actual Contingent Interest payment would be made later. This could cause
Mortgage Note holders using a fiscal year other than the calendar year to
recognize ordinary interest income in one fiscal year, while receiving the
Contingent Interest payment in cash in the following year. Also, if a Mortgage
Note were sold after the amount of the Contingent Interest payment became fixed
but before the record date for the payment, the selling Mortgage Note holder
would recognize ordinary interest income with respect to such payment but would
not receive the actual Contingent Interest payment when made. Although it is not
free from doubt, if a Contingent Interest payment is deferred, it appears that
only the discounted present value of the sum of the deferred Contingent Interest
plus any interest thereon would be taken into income as interest when such
payment becomes fixed, and the difference between such discounted present value
and the deferred Contingent Interest payment plus any interest thereon (the
"Deferred Payment Discount") should be taken into income as interest, on a
constant interest rate basis, from the date when such payment becomes fixed
through the Maturity Date. If the deferred Contingent Interest payment were made
prior to the Maturity Date, the Mortgage Note holder would include in income the
unamortized portion of the Deferred Payment Discount on the date of receipt.
MARKET DISCOUNT
If a holder of the Mortgage Notes purchases Mortgage Notes for an amount
that is less than the adjusted issue price for such Mortgage Notes, the amount
of the difference will be treated as "market discount" for federal income tax
purposes, unless such difference is less than a specified de minimis amount.
Under the market discount rules, a holder of the Mortgage Notes will be required
to treat any principal payment on, or any gain on the sale, exchange, retirement
or other disposition of the Mortgage Notes as ordinary income to the extent of
the market discount that has not previously been included in income and is
treated as having accrued on such Mortgage Notes at the time of such payment or
disposition. In addition, a holder of the Mortgage Notes may be required to
defer, until the maturity of the Mortgage Notes or its earlier disposition in a
taxable transaction, the deduction of all or a portion of the interest expense
on any indebtedness incurred or continued to purchase or carry such Mortgage
Notes.
Any market discount will be considered to accrue ratably during the period
from the date of acquisition to the maturity date of the Mortgage Notes, unless
the holder of the Mortgage Notes elects to accrue on a constant interest method.
A holder of Mortgage Notes may elect to include market discount in income
currently as it accrues (on either a ratable or constant interest method), in
which case the rule described above regarding deferral of interest deductions
will not apply. This election to include market discount in income currently,
once made, applies to all market discount obligations acquired on or after the
first taxable year to which the election applies and may not be revoked without
the consent of the IRS.
ACQUISITION PREMIUM
A holder who purchases Mortgage Notes for an amount that is greater than
the adjusted issue price of the Mortgage Notes but equal to or less than the sum
of all amounts payable on the Mortgage Notes after the purchase date other than
payments of qualified stated interest will be considered to have purchased such
Mortgage Notes at an "acquisition premium." Under the acquisition premium rules,
the amount of OID that
82
<PAGE> 87
such holder of the Mortgage Notes must include in its gross income with respect
to such Mortgage Notes for any taxable year will be reduced by the portion of
such acquisition premium properly allocable to such year.
DISPOSITION OF A MORTGAGE NOTE
In general, a Mortgage Note holder will recognize gain or loss upon the
sale, exchange, redemption, retirement or other taxable disposition of the
Mortgage Note measured by the difference between: (i) the amount of cash and the
fair market value of property received (other than amounts attributable to, and
taxable as, accrued qualified stated interest); and (ii) the Mortgage Note
holder's tax basis in the Mortgage Note (as increased by any original issue
discount, market discount and unpaid Contingent Interest previously included in
income by the Mortgage Note holder and decreased by any payment on the Mortgage
Note received by the Mortgage Note holder other than qualified stated interest
and any amortized premium). Any such gain or loss (except with respect to market
discount) generally will be long-term capital gain or loss, provided that the
Mortgage Note was a capital asset in the Mortgage Note holder's hands and had
been held for more than one year. The deductibility of capital losses is subject
to limitation.
Original purchasers should also note that the federal income tax treatment
of subsequent purchasers may be affected by the original issue discount, market
discount and amortizable bond premium provisions of the Code.
BACKUP WITHHOLDING
A Mortgage Note holder may be subject to backup withholding at the rate of
31% with respect to interest paid or deemed paid on, and gross proceeds of a
sale of, the Mortgage Notes, unless such Mortgage Note holder: (a) is a
corporation or comes within certain other exempt categories and, when required,
demonstrates this fact; or (b) provides a correct taxpayer identification
number, certifies as to no loss of exemption from backup withholding and
otherwise complies with applicable requirements of the backup withholding rules.
A Mortgage Note holder who does not provide the Company with its correct
taxpayer identification number may be subject to penalties imposed by the IRS.
Any amount withheld under these rules will be creditable against the Mortgage
Note holder's federal income tax liability.
The Company will report to the Mortgage Note holders and the IRS the amount
of any "reportable payments" (including interest paid or deemed paid on the
Mortgage Notes) and any amount withheld with respect to the Mortgage Notes
during each calendar year.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS FOR
GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, EACH PROSPECTIVE
PURCHASER OF MORTGAGE NOTES SHOULD CONSULT ITS TAX ADVISOR WITH RESPECT TO THE
TAX CONSEQUENCES TO IT OF THE ACQUISITION, OWNERSHIPS AND DISPOSITION OF THE
MORTGAGE NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL, FOREIGN
AND OTHER TAX LAWS.
83
<PAGE> 88
UNDERWRITING
Subject to the terms and conditions of an Underwriting Agreement (the
"Underwriting Agreement") by and between Jefferies & Company, Inc. (the
"Underwriter") and the Company, the Underwriter has agreed to purchase from the
Company, and the Company has agreed to sell to the Underwriter, an aggregate of
$100.0 million principal amount of Mortgage Notes.
The Underwriting Agreement provides that the obligations of the Underwriter
are subject to certain conditions precedent. The Company has agreed in the
Underwriting Agreement to indemnify the Underwriter and its controlling persons,
officers, directors and agents against certain liabilities in connection with
the offer and sale of the Mortgage Notes, including liabilities under the
Securities Act, and to contribute to payments that the Underwriter may be
required to make in respect thereof. The nature of the Underwriter's obligation
under the Underwriting Agreement is such that it is required to purchase all of
the Mortgage Notes if the Underwriter purchases any of the Mortgage Notes.
The Company has been advised by the Underwriter that the Underwriter
proposes initially to offer the Mortgage Notes to the public at the price set
forth on the cover page of this Prospectus. After the Mortgage Notes are
released for sale to the public, the price at which the Mortgage Notes are being
offered and any other offering terms may be changed at any time without notice.
The Underwriter does not intend to confirm sales to any accounts over which it
exercises discretionary authority.
In connection with the Offering, Ambient Capital Group, Inc. ("Ambient")
has rendered certain financial advisory services to the Company, for which it
will receive $400,000. Ambient is not an underwriter with respect to the
Offering.
The Mortgage Notes will constitute a new class of securities with no
established trading market. The Company does not intend to apply for the listing
of the Mortgage Notes on any national securities exchange and no assurance can
be given that an active public market for the Mortgage Notes will develop. The
Company has been advised by the Underwriter that it currently intends to make a
market in the Mortgage Notes; however, the Underwriter is not obligated to do so
and any market-making activities with respect to the Mortgage Notes may be
discontinued at any time without notice. In addition, such market making
activity will be subject to the limits imposed by the Securities Act and the
Exchange Act and no assurance can be given as to the liquidity of or the trading
market for the Mortgage Notes. See "Risk Factors -- Absence of Public Market for
the Mortgage Notes."
LEGAL MATTERS
Certain legal matters in connection with the Mortgage Notes offered hereby
will be passed upon for the Company by Vial, Hamilton, Koch & Knox, L.L.P.,
Dallas, Texas. Certain legal matters in connection with the Mortgage Notes will
be passed upon for the Underwriter by Latham & Watkins, Los Angeles, California.
EXPERTS
The Consolidated Financial Statements of the Company at March 31, 1995 and
1994 and for each of the three years in the period ended March 31, 1995 included
in this Prospectus and the related financial statement schedule included
elsewhere in the Registration Statement have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their reports appearing herein and
elsewhere in the Registration Statement and have been so included in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.
84
<PAGE> 89
INDEX TO FINANCIAL STATEMENTS
AMERICAN RICE, INC.:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report........................................................ F-2
Consolidated Balance Sheets at March 31, 1994 and 1995.............................. F-3
Consolidated Statements of Operations for the Three Years Ended March 31, 1995...... F-4
Consolidated Statements of Cash Flows for the Three Years Ended March 31, 1995...... F-5
Consolidated Statements of Stockholders' Equity for the Three Years Ended March 31,
1995.............................................................................. F-7
Notes to Consolidated Financial Statements.......................................... F-8
Consolidated Balance Sheets at March 31, 1995 and June 30, 1995 (unaudited)......... F-18
Consolidated Statements of Operations for the Three Months Ended June 30, 1994
(unaudited) and June 30, 1995 (unaudited)......................................... F-19
Consolidated Statements of Cash Flows for the Three Months Ended June 30, 1994
(unaudited) and June 30, 1995 (unaudited)......................................... F-20
Consolidated Statements of Stockholders' Equity for the Three Months Ended June 30,
1995 (unaudited).................................................................. F-21
Notes to Consolidated Financial Statements (unaudited).............................. F-22
</TABLE>
F-1
<PAGE> 90
INDEPENDENT AUDITORS' REPORT
American Rice, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheets of American Rice,
Inc. and subsidiaries ("ARI") at March 31, 1995 and 1994 and the related
consolidated statements of operations, cash flows and stockholders' equity for
each of the three years in the period ended March 31, 1995. These financial
statements are the responsibility of ARI's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of ARI at March 31, 1995 and 1994, and the
results of its operations and its cash flows for each of the three years in the
period ended March 31, 1995 in conformity with generally accepted accounting
principles.
As discussed in Note 1 of Notes to Consolidated Financial Statements, in May
1993 ARI consummated a transaction to acquire substantially all the assets and
assume all the liabilities of Comet Rice, Inc. ("Comet"), a wholly owned
subsidiary of ERLY Industries Inc. ("ERLY"). After the acquisition, ERLY holds
81 percent of the voting power of ARI's stock. The acquisition has been
accounted for as a reverse step acquisition of ARI by Comet.
DELOITTE & TOUCHE LLP
Houston, Texas
May 26, 1995
F-2
<PAGE> 91
AMERICAN RICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1995 1994
-------- --------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE
AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 1,864 $ 1,721
Accounts receivable, net............................................. 33,423 22,222
Inventories:
Finished goods.................................................... 17,108 31,935
Raw materials..................................................... 33,097 26,273
Prepaid expenses..................................................... 793 606
Deferred income taxes................................................ 3,451 3,691
-------- --------
Total current assets......................................... 89,736 86,448
Net assets of Houston properties held for sale......................... 18,767 18,764
Other assets........................................................... 15,710 17,635
Receivable from ERLY................................................... 11,901 10,499
Property, plant and equipment, net..................................... 41,386 41,724
-------- --------
Total assets................................................. $177,500 $175,070
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable........................................................ $ 33,937 $ 32,876
Accounts payable..................................................... 23,535 23,734
Accrued expenses..................................................... 10,837 7,558
Income taxes payable to ERLY......................................... 1,037 1,456
Current portion of long-term debt.................................... 6,727 6,060
-------- --------
Total current liabilities.................................... 76,073 71,684
Long-term debt......................................................... 48,573 56,148
Deferred income taxes.................................................. 8,616 6,870
Minority interest...................................................... 26 69
Commitments and contingencies (Note 7)
Stockholders' equity (Note 4):
Preferred stock, $1.00 par value; 4,000,000 shares authorized;
Series A -- 777,777 convertible shares issued and outstanding,
liquidation preference of $19,989................................. 778 3,889
Series B -- 2,800,000 convertible shares issued and outstanding,
liquidation preference of $14,000................................. 2,800 14,000
Series C -- 300,000 shares issued and outstanding, liquidation
preference of $1,500.............................................. 300 1,500
Common stock, $1.00 par value; 10,000,000 shares authorized;
2,443,892 shares issued and outstanding........................... 2,444 12,219
Additional paid-in capital........................................... 25,286 --
Retained earnings.................................................... 13,352 9,439
Cumulative foreign currency translation adjustments.................. (748) (748)
-------- --------
Total stockholders' equity........................................... 44,212 40,299
-------- --------
Total liabilities and stockholders' equity................... $177,500 $175,070
======== ========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE> 92
AMERICAN RICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Net sales.................................................. $373,050 $284,464 $169,617
Cost of sales.............................................. 332,236 248,046 161,254
-------- -------- --------
Gross profit..................................... 40,814 36,418 8,363
Selling, general and administrative expenses............... 23,235 21,497 10,779
-------- -------- --------
Operating income (loss).................................... 17,579 14,921 (2,416)
Interest expense........................................... 12,344 9,884 5,232
Interest income............................................ (727) (818) (1,753)
Other (income) expense..................................... (153) 560 (260)
(Earnings) loss on equity investment....................... -- (426) 1,630
Write-down of plant facility............................... -- -- 4,000
-------- -------- --------
Earnings (loss) before income taxes and extraordinary
items.................................................... 6,115 5,721 (11,265)
Provision for income taxes................................. 2,202 2,256 --
-------- -------- --------
Earnings (loss) before extraordinary items................. 3,913 3,465 (11,265)
Extraordinary items -- Gain on debt restructuring, net of
income taxes............................................. -- 9,318 4,726
-------- -------- --------
Net earnings (loss)........................................ 3,913 12,783 $ (6,539)
========
Preferred stock dividend requirements...................... (5,930) (4,942)
-------- --------
Net earnings (loss) applicable to common stock............. $ (2,017) $ 7,841
======== ========
Primary earnings (loss) per applicable common and common
equivalent share (Note 2):
Loss before extraordinary item........................... $ (0.83) $ (0.45)
Extraordinary item....................................... -- 2.90
-------- --------
Net earnings (loss)...................................... $ (0.83) $ 2.45
======== ========
Fully diluted earnings (loss) per applicable common and
common equivalent share (Note 2):
Earnings (loss) before extraordinary item................ $ (0.83) $ 0.35
Extraordinary item....................................... -- 1.15
-------- --------
Net earnings (loss)...................................... $ (0.83) $ 1.50
======== ========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE> 93
AMERICAN RICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)........................................ $ 3,913 $ 12,783 $ (6,539)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) in operating activities:
Depreciation............................................. 3,894 3,621 1,991
Amortization of debt issuance costs and trademarks....... 2,511 1,462 --
Loss on sales of property................................ 48 1,211 --
Extraordinary items -- gain on debt restructuring, net of
income taxes.......................................... -- (9,318) (4,726)
(Earnings) loss on equity investment..................... -- (426) 1,630
Write-down of plant facility............................. -- -- 4,000
Deferred tax provision................................... 1,986 651 --
Provision for loss on accounts receivable................ -- 3,245 2,400
Changes in assets and liabilities that provided (used)
cash:
Accounts receivable................................... (11,201) (2,665) 9,128
Inventories........................................... 8,003 (23,712) 19,354
Prepaid expenses...................................... (187) (706) 424
Income taxes payable to ERLY.......................... (419) 1,456 --
Other assets.......................................... (679) (1,572) (1,162)
Accounts payable...................................... (199) 4,770 (11,890)
Accrued expenses...................................... 3,279 (2,642) 937
Receivable from ERLY.................................. (1,402) (519) 4,234
-------- -------- --------
Net cash provided (used in) operating
activities..................................... 9,547 (12,361) 19,781
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment additions.................... (3,562) (2,844) (2,651)
Proceeds from sales of assets.............................. 48 2,923 2,581
Cash acquired in acquisition of American Rice, Inc. ....... -- 12,608 --
-------- -------- --------
Net cash provided by (used in) investing
activities..................................... (3,514) 12,687 (70)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in notes payable....................... 1,061 (7,596) (14,870)
Proceeds from issuance of long-term debt................... -- 65,300 --
Repayment of long-term debt................................ (6,908) (58,955) (2,586)
Increase (decrease) in subordinated debt................... -- (106) 303
Other, net................................................. (43) 12 (875)
-------- -------- --------
Net cash used in financing activities............ (5,890) (1,345) (18,028)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... 143 (1,019) 1,683
CASH AND CASH EQUIVALENTS:
Beginning of the period.................................. 1,721 2,740 1,057
-------- -------- --------
End of the period........................................ $ 1,864 $ 1,721 $ 2,740
======== ======== ========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE> 94
AMERICAN RICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL SCHEDULE OF INVESTING AND FINANCING ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31, 1994
--------------
(IN THOUSANDS)
<S> <C>
Preferred Stock Series B was issued to ERLY.................................... $ 14,000
=======
As part of financing activities, Preferred Stock Series C was issued to
ARI's former lenders......................................................... $ 1,500
=======
As part of financing activities, ERLY issued notes payable to ARI's former
lenders and the benefit received was offset against receivables owed to ARI
by ERLY...................................................................... $ 3,000
=======
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE> 95
AMERICAN RICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN TOTAL
ADDITIONAL RETAINED CURRENCY STOCK-
PREFERRED COMMON PAID-IN EARNINGS TRANSLATION HOLDERS'
STOCK STOCK CAPITAL (DEFICIT) ADJUSTMENTS EQUITY
--------- ------- ---------- --------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance April 1, 1992...................... $ -- $ 10 $ 13,597 $ 6,351 $ (654) $19,304
Net loss................................... -- -- -- (6,539) -- (6,539)
Foreign currency translation adjustments... -- -- -- -- (66) (66)
--------- ------- ---------- --------- ------------ ---------
Balance March 31, 1993..................... -- 10 13,597 (188) (720) 12,699
Net earnings............................... -- -- 12,783 -- 12,783
Foreign currency translation adjustments... -- -- -- (28) (28)
Issue Series C Preferred Stock............. 1,500 -- -- (1,500) -- --
American Rice, Inc. acquisition............ 17,889 12,209 (13,597) (1,656) -- 14,845
--------- ------- ---------- --------- ------------ ---------
Balance March 31, 1994..................... 19,389 12,219 -- 9,439 (748) 40,299
Reverse stock split (Note 4)............... (15,511) (9,775 ) 25,286 -- -- --
Net earnings............................... -- -- -- 3,913 -- 3,913
--------- ------- ---------- --------- ------------ ---------
Balance March 31, 1995..................... $ 3,878 $2,444 $ 25,286 $13,352 $ (748) $44,212
========= ======== ========= ========= ============ ========
</TABLE>
See notes to consolidated financial statements
F-7
<PAGE> 96
AMERICAN RICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
On May 26, 1993, American Rice, Inc. ("ARI") consummated a transaction to
acquire substantially all of the assets of Comet Rice, Inc. ("Comet"), other
than the ARI capital stock owned by Comet, and assume all of Comet's liabilities
(the "Acquisition") in exchange for 14 million shares (before the reverse stock
split -- see Note 4) of a newly created Series B $1 par value preferred stock.
Comet was a wholly owned subsidiary of ERLY Industries Inc. ("ERLY").
Comet's combined holdings of ARI Common Stock and Series A Preferred Stock,
prior to the Acquisition, represented approximately 48 percent of the voting
power of the outstanding ARI stock. As a result of the Acquisition, Comet held
81 percent of the combined voting power of ARI stock outstanding after the
Acquisition. In connection with the Acquisition, ERLY has succeeded to the ARI
stock held by Comet by the liquidation of Comet.
Since ERLY, the sole shareholder of Comet at the time of the Acquisition,
owned the larger portion of the voting rights in the surviving corporation, the
Acquisition was accounted for as a reverse step acquisition of ARI by ERLY
through its subsidiary, Comet, reflecting the change of control which occurred.
The fair value of ARI was estimated to be approximately $35 million based upon a
valuation study done by an investment banker. The accounting consists of two
steps: Step one consists of a recognition by ARI of ERLY's historical cost of
its original 48 percent interest. When ERLY purchased 48 percent of ARI in 1988
for $20 million and Comet's 50% interest in Comet American Marketing ("CAM"),
the purchase price was greater than 48 percent of ARI's stockholders' equity.
ERLY attributed the excess to ARI's 39 acres of land in Houston and thus the
excess ($5.2 million) was added to the book value of the Houston property with a
corresponding increase in equity. Step two recognizes the acquisition by ERLY of
an additional equity interest in ARI of approximately 33 percent, in exchange
for substantially all of the assets of Comet and all of Comet's liabilities.
ARI's assets and liabilities are valued at fair market value to the extent
acquired. The assets and liabilities of Comet have not been revalued in ARI's
financial statements.
Because Comet is the acquirer for accounting purposes, the consolidated
financial statements presented at March 31, 1993 and for the year ended March
31, 1993 are those of Comet, not ARI. In addition, the operating results for the
period April 1, 1993 through the date of the Acquisition, May 26, 1993, are
those of Comet, not ARI. Operating results thereafter reflect the combined
operations of Comet and ARI. For convenience purposes, unless otherwise
specifically indicated, the entity is hereafter referred to as ARI for all
periods presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations -- ARI is involved in all phases of rice processing (including
the processing of parboiled rice, regular milled rice, instant rice and rice
by-products), packaging and marketing. These rice products are sold in the
international and domestic markets directly by ARI through many distribution
channels under a variety of brands. Distribution channels in the international
market vary from country to country and include sales to government agencies and
commercial importers, as well as through wholesalers and international brokers.
Principles of Consolidation -- The accompanying consolidated financial
statements include the accounts of ARI and its majority-owned subsidiaries and
joint ventures. All significant intercompany accounts, intercompany profits and
intercompany transactions are eliminated.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
F-8
<PAGE> 97
AMERICAN RICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Statement of Cash Flows -- For purposes of reporting cash flows, cash and
cash equivalents include cash on hand and highly liquid debt instruments
purchased with a maturity of three months or less. Borrowings and repayments on
revolving notes, payments for income taxes, and payments for interest and
financing fees are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Revolving Notes (in millions):
Borrowings............................................. $355.3 $289.9 $ 6.7
Repayments............................................. 354.2 297.5 21.6
Payments for interest and financing fees (in millions)... $ 9.2 $ 9.8 $ 5.2
Payments for federal and state income taxes (in
thousands)............................................. $ 635 $ 344 $ 56
</TABLE>
Inventories -- Inventories are accounted for by the first-in, first-out
cost method (FIFO), or market, if lower.
ARI, from time to time, buys and sells futures and options contracts on
rice as an operational tool to manage its inventory position. Gains and losses
on contracts that meet defined criteria are recognized upon completion of the
transaction, while gains and losses from all other contracts are recognized in
the period in which the market value of the contracts change.
Property, Plant and Equipment -- Property, plant and equipment are stated
at cost. Depreciation is provided by the straight-line method based on the
estimated useful lives of the various classes of property, which range from 10
to 45 years for buildings and improvements and 3 to 25 years for machinery and
equipment.
Expenditures for maintenance and repairs are charged to expense as
incurred.
Properties Held for Sale -- Properties held for sale consist primarily of
39 acres of land in Houston, Texas. Management believes that the net realizable
value of properties held for sale exceed their carrying value.
Trademarks -- Trademarks are being amortized on a straight-line basis over
40 years. ARI utilizes estimated future undiscounted cash flows of related
product sales to evaluate any possible impairments.
Debt Issuance Costs -- Debt issuance costs are stated at cost and amortized
over the life of the related debt using the effective interest method.
Amortization of debt issuance costs is included in interest expense in the
consolidated statements of operations.
Federal Income Taxes -- Subsequent to the Acquisition, ARI's current
taxable income and loss is included in the consolidated federal income tax
return filed by ERLY. Under the terms of the tax sharing agreement between ARI
and ERLY, ARI will pay to or receive from ERLY the amount of income taxes
currently payable or refundable computed as if ARI filed its annual tax return
on a separate company basis. The tax sharing agreement provides that ERLY will
receive the benefit of any pre-Acquisition tax net operating loss carryforwards
generated by Comet.
ARI's provision for income taxes is computed as if the Company files its
annual tax return on a separate company basis. Deferred taxes are established
for the temporary differences between the financial reporting basis and the tax
basis of ARI's assets and liabilities at enacted rates.
Earnings Per Share -- The computation of earnings per common share is based
on the earnings available to holders of common shares and the weighted average
number of common and common equivalent shares outstanding during the periods
presented. Common stock equivalents and contingent common stock issues are not
included in the computation of earnings per share when their inclusion would
increase earnings per share
F-9
<PAGE> 98
AMERICAN RICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
or decrease the loss per share ("antidilution"). Earnings per share is not
presented for the year ended March 31, 1993 because Comet was a wholly owned
subsidiary of ERLY.
Earnings applicable to common stock reflect dividends in the amount of
$5.930 million and $4.942 million for the year ended March 31, 1995 and for the
period from May 27, 1993 to March 31, 1994, respectively, on the Series B
Preferred Stock and the Series C Preferred Stock. These dividends are cumulative
and have not been declared by ARI. The annual cumulative dividend on the Series
B Preferred Stock is $1.85 per share, or $5.18 million and the annual cumulative
dividend on the Series C Preferred Stock is $2.50 per share or $750,000. Various
lending agreements prohibit the payment of any dividends.
The weighted average number of shares included in the earnings per share
calculation are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------------------------------
1995 1994
------------------------------- -------------------------------
PRIMARY FULLY DILUTED PRIMARY FULLY DILUTED
------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Common stock............................. 2,444 2,444 2,444 2,444
Preferred stock -- Series A.............. -- -- 778 778
Preferred stock -- Series B.............. -- -- -- 4,741
----- ----- ----- -----
Total.......................... 2,444 2,444 3,222 7,963
===== ===== ===== =====
</TABLE>
Fair Value of Financial Instruments -- ARI's financial instruments consist
primarily of cash, trade accounts and notes receivable, accounts payable and
debt instruments. The book values of cash, trade receivables and accounts
payable are representative of their respective fair values due to the short-term
maturity of these instruments. The book value of ARI's debt instruments is
considered to approximate the fair value as the interest rates of such
instruments are based on the prime rate. It is not practicable to estimate the
fair value of the note receivable from ERLY (Note 13) because of its related
party nature.
Reverse Stock Split -- On September 1, 1994, ARI's shareholders approved a
one-for-five reverse stock split for all issues of preferred and common stock.
All per share information in the financial statements has been adjusted for this
reverse stock split.
Reclassifications -- Certain reclassifications have been made to the prior
period consolidated financial statements to conform to the consolidated
financial statement presentation at March 31, 1995 and for the year then ended.
3. NOTES PAYABLE AND LONG-TERM DEBT
At May 26, 1995, ARI had a $47.5 million revolving credit line with
Congress Financial Corporation ("Congress") which was renewed on May 24, 1995
through May 23, 1996. This revolver carried an interest rate of prime (9% at
March 31, 1995) plus two percent. This facility requires that all ARI cash
receipts be paid to Congress as payment on the loan, requires that collateral
and borrowing base reports be prepared frequently by ARI to support requests for
borrowings, and is collateralized by receivables, inventory, a $2 million key
man life insurance policy on Gerald D. Murphy, and junior liens on ARI assets
pledged to the term lenders. At March 31, 1995 and 1994, approximately $31
million and $33 million, respectively, were outstanding under the Congress
revolving line of credit.
During 1995, approximately $2.9 million in short-term notes were obtained
from various foreign lenders to finance inventory. These notes will mature on or
before June 30, 1995, bear interest at rates ranging from 8.75% to 25.2% per
year and are non-recourse to ARI.
F-10
<PAGE> 99
AMERICAN RICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Chase Manhattan Bank............................................. $23,755 $26,567
Internationale Nederlanden Bank N.V.............................. 23,755 26,567
Texas Commerce Bank.............................................. 6,842 7,966
Other notes...................................................... 948 1,108
------- -------
Total debt.................................................. 55,300 62,208
Less current maturities.......................................... 6,727 6,060
------- -------
Total long-term debt........................................ $48,573 $56,148
======= =======
</TABLE>
ARI's long-term debt maturities are as follows:
<TABLE>
<CAPTION>
AMOUNT
YEAR ENDING MARCH 31, --------------
----------------------------------------------- (IN THOUSANDS)
<S> <C>
1996........................................... $ 6,727
1997........................................... 17,845
1998........................................... 30,260
1999........................................... 160
2000........................................... 160
Thereafter..................................... 148
</TABLE>
Interest rates on the long-term debt range from prime plus 3 percent to
prime plus 5 percent through May 31, 1995, increasing to a range of prime plus 6
percent to prime plus 8 percent by June 1997. At March 31, 1995, the weighted
average interest rate on the term debt was 12.3%. These loans are collateralized
by substantially all of ARI's fixed assets and trademarks, and have junior liens
on collateral of the revolving credit line. In addition, 2.6 million shares of
Series B Preferred Stock have been pledged by ERLY as collateral. Terms of the
loans preclude dividend payments, restrict investments and capital expenditures
and require the maintenance of certain financial covenants. At March 31, 1995,
ARI was not in compliance with certain of these provisions; however, the term
lenders have waived such non-compliance.
ARI's term and revolving debt agreements require ERLY to guarantee the debt
of ARI even though ARI's management believes that ERLY will not be a source of
additional financing to ARI. These agreements contain certain cross-default
provisions with ERLY debt agreements which provide the lenders with the option
of accelerating repayment of the ARI debt and terminating the agreements under
certain conditions related to ERLY's ability to meet its obligations as they
come due and to remain in compliance with its debt covenants.
4. STOCKHOLDERS' EQUITY
At a special meeting on September 1, 1994, ARI's shareholders approved a
one-for-five reverse stock split for all issues of preferred and common stock.
Trading on the new basis was effective on September 8, 1994.
Holders of the common stock are entitled to one vote per share on all
matters to be voted on by shareholders and are entitled, subject to any
preferential rights of holders of preferred stock, to receive dividends, if any,
as may be declared from time to time by the Board of Directors of ARI. Upon any
liquidation or dissolution of ARI, the holders of the common stock are entitled,
subject to any preferential
F-11
<PAGE> 100
AMERICAN RICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
rights of holders of preferred stock, to receive a pro rata share of all the
assets remaining available for distribution to shareholders after payment of all
liabilities.
The Board of Directors of ARI, without further action by the shareholders,
is authorized to issue shares of preferred stock in one or more series, and with
respect to each series, to determine the rate of dividends, terms of redemption,
amount payable upon liquidation, sinking fund provisions, terms of conversion
and voting rights. Rights with respect to dividends and liquidation may be more
favorable than those of the holders of the common stock.
At March 31, 1995, ARI had three series of preferred stock: Series A,
Series B and Series C. Series A Preferred Stock and Series B Preferred Stock are
owned by ERLY and Series C Preferred Stock is owned by a group of former ARI
lenders.
The Series A Preferred Stock has no rights of redemption or sinking fund
provisions, but upon any liquidation of ARI, ARI must pay the holders of this
series of preferred stock $25.70 per share (aggregate of $19.989 million) before
any amounts may be paid to the holders of the common stock. The holders of this
series of preferred stock are entitled to one vote per share on all matters upon
which the holders of common stock have the right to vote and are generally
entitled to vote as a class on any matters adversely affecting their rights as
holders of this series of preferred stock. Each share of this series of
preferred stock is convertible into one share of common stock upon the election
of the holder of this preferred stock.
The Series B Preferred Stock has no rights of redemption or sinking fund
provisions, but upon any liquidation of ARI, ARI must pay the holders of this
series of preferred stock $5.00 per share (aggregate of $14.0 million) before
any amounts may be paid to the holders of the common stock. Each share of this
series of preferred stock provides for annual cumulative, non-participating
dividends of $1.85. Cumulative dividends in arrears on Series B Preferred Stock
were $9.497 million at March 31, 1995 (Note 2). The holders of this series of
preferred stock are entitled to two votes per share on all matters upon which
the holders of common stock have the right to vote and are generally entitled to
vote as a class on any matters adversely affecting their rights as holders of
this series of preferred stock. Each share of this series of preferred stock is
convertible into two shares of common stock upon the election of the holder of
this preferred stock. ERLY has pledged the preferred stock to current and former
term lenders (see Notes 3 and 6).
The Series C Preferred Stock was issued to certain former lenders of ARI in
partial satisfaction of ARI's indebtedness to them. The Series C Preferred Stock
has no rights of redemption or sinking fund provisions, but upon any liquidation
of ARI, ARI must pay the holders of the Series C Preferred Stock $5.00 per share
(aggregate of $1.5 million) before any amounts may be paid to the holders of the
common stock. The Series C Preferred Stock is callable by ARI at any time at a
price of $26.35 per share less aggregate dividend payments per share. The Series
C Preferred Stock provides for annual cumulative, non-participating dividends of
$2.50 per share, is non-convertible and non-voting. Cumulative dividends in
arrears on Series C Preferred Stock were $1.375 million at March 31, 1995 (Note
2).
The Series B Preferred Stock and Series C Preferred Stock rank pari passu
with respect to liquidation preference rights and dividend declarations (up to
$.27 per share of Series B Preferred Stock). ARI's articles of incorporation
also provide that, so long as any shares of Series B Preferred Stock or Series C
Preferred Stock are outstanding, ARI will not authorize or create any class or
series of stock, or increase the authorized amount of preferred stock, ranking
(either as to payment of dividends or distribution of assets) prior to such
preferred stock.
ARI's current debt agreements prohibit the payment of any dividends and do
not provide any basis on which the lenders will approve a dividend payment.
ARI issued warrants to the term lenders to purchase up to 155,000 shares of
ARI Common Stock at $5.00 per share. The warrants expire May 26, 2001.
F-12
<PAGE> 101
AMERICAN RICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. TAXES ON INCOME
As a result of the net operating losses incurred during the year ended
March 31, 1993, no provision for income taxes was allocated to Comet by ERLY for
this period. The provision for taxes on income consist of:
<TABLE>
<CAPTION>
YEAR ENDED MARCH
31,
-------------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
U. S. taxes currently payable............ $ 94 $ 1,456
Deferred U. S. taxes..................... 1,986 651
State income taxes....................... 122 149
------ ------
Total.................................. $ 2,202 $ 2,256
====== ======
</TABLE>
As discussed in Note 1, Comet was a wholly owned subsidiary of ERLY for the
year ended March 31, 1993. The primary differences at March 31, 1993 between the
financial statement and tax bases of assets and liabilities were related to
fixed assets, property held for sale, and the allowance for doubtful accounts.
Net deferred taxes arising from these temporary differences were offset by
existing net operating loss carryforwards of Comet on a stand-alone basis.
Temporary differences which give rise to deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------------------------
1995 DEFERRED TAX 1994 DEFERRED TAX
--------------------- ---------------------
ASSET LIABILITY ASSET LIABILITY
------- --------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Property, plant and equipment....................... $ -- $ 10,113 $ -- $ 10,057
Allowance for doubtful accounts and other
reserves.......................................... 1,085 -- 2,318 --
Change in tax accounting principles................. 1,779 -- 2,588 --
Alternative minimum tax credit...................... 1,683 -- 1,456 --
Net operating loss carryovers....................... 221 -- 508 --
Other............................................... 180 -- 180 172
------ ------- ------ -------
Total............................................. $ 4,948 $ 10,113 $ 7,050 $ 10,229
====== ======= ====== =======
</TABLE>
In fiscal 1994, the tax expense attributable to the extraordinary item
(gain on debt restructuring) was reduced by approximately $2.8 million to
reflect the tax benefit of utilization of operating loss carryforwards.
A comparison of income tax expense at the federal statutory rate to ARI's
provision in lieu of taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH
31,
-------------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Earnings before income taxes and extraordinary items............. $ 6,115 $ 5,721
====== ======
Statutory taxes.................................................. $ 2,079 $ 2,002
Amortization of trademarks....................................... 135 90
Non-deductible entertainment and other........................... (134) 15
State income taxes............................................... 122 149
------ ------
Provision for taxes on income.................................... $ 2,202 $ 2,256
====== ======
Effective tax rate............................................... 36.0% 39.4%
====== ======
</TABLE>
F-13
<PAGE> 102
AMERICAN RICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under federal tax laws, tax operating losses occur when deductions are
greater than taxable income. These losses may be carried back to offset taxable
income in earlier years before being carried forward to offset taxable income in
future years. At March 31, 1995, operating loss carryforwards for federal tax
return purposes totaled approximately $600,000. These loss carryforwards are not
available for carryback to prior years for a refund. If they do not offset
future years' taxable income, these losses will expire in 2007.
6. EXTRAORDINARY ITEMS
Operating results for the year ended March 31, 1994 include a gain on debt
restructuring arising from ARI's May 1993 refinancing of the combined
indebtedness of ARI and Comet. ARI's former lenders agreed to a debt discount in
the approximate amount of $10.3 million ($9.3 million, net of tax). As
additional consideration for the satisfaction of the existing indebtedness of
ARI, 200,000 shares of Series B Preferred Stock were pledged by ERLY and ERLY
issued $3 million of notes for the benefit of the former lenders. This $3
million is reflected in the ARI financial statements as a reduction in the
receivable from ERLY.
Due to continuing operating losses resulting from low margins, ARI
suspended payments on a $16 million non-recourse obligation secured by its rice
plant in Greenville, Mississippi. In July 1992, the facility was sold through a
foreclosure sale and in conjunction therewith, debt in the amount of $16 million
and the related property, plant and equipment was eliminated. Prior to the
disposition, the plant was written down by $4 million to its estimated fair
market value. This writedown is included in the results of operations before
income taxes and extraordinary items for the year ended March 31, 1993. The
difference between the estimated fair market value of the facility and the
amount of debt extinguished resulted in a gain of $4.726 million (net of
estimated shut-down and relocation expenses) on the extinguishment of debt which
was recorded as extraordinary income for the year ended March 31, 1993.
7. COMMITMENTS AND CONTINGENCIES
ARI has a commitment for an operating lease relating to the land for its
milling facility in Freeport, Texas. The initial term of the lease expires in
2022 and may be renewed at ARI's option in five-year increments through 2057. In
addition, ARI and its subsidiaries are obligated under operating leases for
other plant facilities, office space in Houston, Texas, and various machinery,
equipment and automobiles. Aggregate minimum rental commitments under operating
leases with noncancellable terms of more than one year are as follows:
<TABLE>
<CAPTION>
AMOUNT
YEAR ENDING MARCH 31, --------------
----------------------------------------------- (IN THOUSANDS)
<S> <C>
1996........................................... $ 2,425
1997........................................... 2,034
1998........................................... 1,162
1999........................................... 857
2000........................................... 679
Thereafter..................................... 16,500
</TABLE>
ARI incurred total rental expense of approximately $4.0 million, $2.4
million and $1.3 million for the years ended March 31, 1995, 1994 and 1993,
respectively.
ARI is involved in litigation in the ordinary course of business. It is the
opinion of management that resolution of such litigation will not have a
material adverse effect on the consolidated financial position or the
consolidated results of operations of ARI.
F-14
<PAGE> 103
AMERICAN RICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. BENEFIT PLANS
ARI had a defined contribution plan which covered substantially all
employees. On January 1, 1994, the ARI plan was merged into the ERLY defined
contribution plan, which is essentially similar in its operations. The ERLY plan
provides for a mandatory 1% matching contribution to the plan on a monthly basis
and an annual contribution solely at the discretion of the Board of Directors.
ARI contributions to the plan for the years ended March 31, 1995, 1994 and 1993
were $1.021 million, $167,000 and $125,000, respectively.
9. EXPORT SALES
Net sales include export sales as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------
1995 1994 1993
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Middle East......................... $ 91,449 $ 89,782 $46,209
Caribbean, Mexico and South
America........................... 84,806 38,935 32,744
Asia................................ 49,963 42,838 670
Europe.............................. 13,632 6,260 10,593
Africa.............................. 3,864 4,012 2,114
Other............................... 65 13 88
-------- -------- -------
Total............................. $243,779 $181,840 $92,418
======== ======== =======
Percent of total revenues......... 65% 64% 54%
======== ======== =======
</TABLE>
10. OTHER ASSETS
Other assets consisted of the following:
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Trademarks....................................... $12,562 $12,971
Investments...................................... 368 163
Debt issuance costs.............................. 1,383 3,234
Notes receivable................................. 662 773
Other............................................ 735 494
------- -------
Total.......................................... $15,710 $17,635
======= =======
</TABLE>
Accumulated amortization of trademarks was $1.799 million and $1.390
million at March 31, 1995 and 1994, respectively.
F-15
<PAGE> 104
AMERICAN RICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows:
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land................................................... $ 275 $ 187
Buildings and improvements............................. 23,222 22,653
Machinery and equipment................................ 35,782 33,172
-------- --------
Total............................................. 59,279 56,012
Less accumulated depreciation.......................... (17,893) (14,288)
-------- --------
Property, plant and equipment, net................ $ 41,386 $ 41,724
======== ========
</TABLE>
12. ACCOUNTS RECEIVABLE
Accounts receivable and allowance for doubtful accounts consisted of the
following:
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable -- trade........................... $ 35,134 $ 24,020
Less allowance for doubtful accounts................... (1,711) (1,798)
-------- --------
Net............................................... $ 33,423 $ 22,222
======== ========
Accounts receivable -- non current..................... $ 471 $ 4,387
Less allowance for doubtful accounts................... (471) (4,387)
-------- --------
Net............................................... $ -- $ --
======== ========
</TABLE>
13. TRANSACTIONS WITH RELATED PARTIES
ARI has entered into a number of transactions in the ordinary course of
business with ERLY and its affiliates, including Pre-Acquisition ARI which was
48 percent owned by Comet.
As a result of the Acquisition, ARI entered into a management agreement
between ERLY and ARI whereby ERLY acts as ARI's agent for the purpose of
providing certain marketing, operating and management services to ARI. In
exchange for such services ARI pays ERLY a monthly management fee of $77,000,
which is adjusted annually based on the most recent published Consumer Price
Index. The agreement is for a period of two years with two-year automatic
renewals unless one party notifies the other that it wishes to terminate the
agreement. Prior to the Acquisition, Comet had a similar management agreement
with ERLY. During the year ended March 31, 1994 and 1993, Comet incurred and
paid $1.1 million and $2.1 million, respectively, in management fees under its
agreement with ERLY.
ARI has a note receivable from ERLY bearing an interest rate of 6 percent.
The note is payable out of dividends received by ERLY on the Series B Preferred
Stock. The balance of the note was $11.9 million and $10.5 million at March 31,
1995 and 1994, respectively. At March 31, 1993, there were several notes which
totaled $12.1 million. During 1993, the notes bore interest at rates between
prime plus 1.5 percent and 22 percent.
Comet also purchased milled and rough rice from Pre-Acquisition ARI, and
sold milled and rough rice to Pre-Acquisition ARI. Such transactions with ARI
were conducted at prices that approximated market rates or were based on
production cost formulas. During the two months ended May 26, 1993, Comet
purchases amounted to $222,000 from ARI and sales to ARI amounted to $3,000.
Total sales to ARI and purchases
F-16
<PAGE> 105
AMERICAN RICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
from ARI amounted to $23.8 million and $13.3 million, respectively, during the
year ended March 31, 1993. Comet had a net receivable from ARI of $4.2 million
at March 31, 1993.
As a result of the Acquisition, ARI assumed an agreement between
Pre-Acquisition ARI and ERLY Juice, Inc. ("Juice"), a wholly-owned subsidiary of
ERLY, whereby Juice acted as ARI's agent for the purpose of providing certain
marketing, sales, credit and general management services to ARI's CAM Division
operations. Pursuant to the agreement, ARI paid Juice a monthly fee for its
services and provided office space. The agreement was terminated in November
1993, as Juice operations were ceased and nearly all remaining Juice employees
became employees of ARI. ARI incurred and paid agency fees under the agreement
of $890,000 during the year ended March 31, 1994.
14. CONDENSED STATEMENT OF OPERATIONS FOR AMERICAN RICE, INC.
(ACQUIRED ENTITY) FOR THE YEAR ENDED MARCH 31, 1993
As discussed in Note 1, prior to the Acquisition in May 1993 Comet's
combined holdings of Common Stock and Series A Preferred Stock represented
approximately 48 percent of the voting power of the outstanding ARI stock. Comet
accounted for the investment in ARI using the equity method of accounting.
ARI's condensed statement of operations for the year ended March 31, 1993
follows (in thousands):
<TABLE>
<S> <C>
Net sales...................................................... $176,619
Cost of sales.................................................. 147,245
--------
Gross profit.............................................. 29,374
Selling, general and administrative expenses................... 18,957
Interest expense............................................... 7,167
--------
Earnings before taxes.......................................... 3,250
Income tax expense............................................. --
--------
Net earnings.............................................. $ 3,250
========
</TABLE>
F-17
<PAGE> 106
AMERICAN RICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1995 1995
----------- -----------
(UNAUDITED)
<S> <C> <C>
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
ASSETS
Current assets:
Cash.............................................................. $ 2,742 $ 1,864
Accounts receivable, net.......................................... 22,167 33,423
Inventories
Finished goods................................................. 21,108 17,108
Raw materials.................................................. 24,920 33,097
Prepaid expenses.................................................. 1,061 793
Deferred income taxes............................................. 3,451 3,451
-------- --------
Total current assets...................................... 75,449 89,736
Net assets of Houston properties held for sale...................... 18,767 18,767
Other assets........................................................ 15,447 15,710
Receivable from ERLY................................................ 12,157 11,901
Property, plant and equipment, net.................................. 41,885 41,386
-------- --------
Total assets.............................................. $ 163,705 $ 177,500
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable..................................................... $ 30,500 $ 33,937
Accounts payable and accrued expenses............................. 25,264 34,372
Income taxes payable to ERLY...................................... 937 1,037
Current portion of long-term debt................................. 6,727 6,727
-------- --------
Total current liabilities................................. 63,428 76,073
Long-term debt...................................................... 47,073 48,573
Deferred income taxes............................................... 8,616 8,616
Minority interest................................................... -- 26
Stockholders' equity (Note 3):
Preferred stock, $1.00 par value; 4,000,000 shares authorized;
Series A -- 777,777 convertible shares issued and outstanding,
liquidation preference of $19,989............................ 778 778
Series B -- 2,800,000 convertible shares issued and
outstanding,
liquidation preference of $14,000............................ 2,800 2,800
Series C -- 300,000 shares issued and outstanding, liquidation
preference of $1,500......................................... 300 300
Common stock, $1.00 par value; 10,000,000 shares authorized;
2,443,892 shares issued and outstanding........................ 2,444 2,444
Paid-in capital................................................... 25,286 25,286
Retained earnings................................................. 13,728 13,352
Cumulative foreign currency translation adjustments............... (748) (748)
-------- --------
Total stockholders' equity........................................ 44,588 44,212
-------- --------
Total liabilities and stockholders' equity................ $ 163,705 $ 177,500
======== ========
</TABLE>
See notes to consolidated financial statements
F-18
<PAGE> 107
AMERICAN RICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED JUNE 30,
---------------------
1995 1994
-------- --------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net sales.............................................................. $ 86,392 $105,706
Cost of sales.......................................................... 76,855 94,383
------- --------
Gross profit......................................................... 9,537 11,323
Selling, general and administrative expenses........................... 5,771 5,272
------- --------
Operating income..................................................... 3,766 6,051
Interest expense....................................................... 3,398 2,898
Interest income........................................................ (175) (171)
Minority interest...................................................... (135) 61
Other income and expense............................................... 91 73
------- --------
Earnings before income taxes........................................... 587 3,190
Provision for income taxes............................................. 211 1,180
------- --------
Net earnings........................................................... $ 376 $ 2,010
======= ========
Preferred stock dividend requirements.................................. 1,483 1,483
------- --------
Net earnings (loss) applicable to common stock......................... $ (1,107) $ 527
======= ========
Earnings (loss) per applicable common and common equivalent share (Note 3):
Primary.............................................................. $ (.45) $ .16
======= ========
Fully diluted........................................................ $ (.45) $ .16
======= ========
</TABLE>
See notes to consolidated financial statements
F-19
<PAGE> 108
AMERICAN RICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED JUNE 30,
---------------------
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings......................................................... $ 376 $ 2,010
Adjustments to reconcile net earnings to net cash provided by (used
in) in operating activities:
Depreciation and amortization..................................... 1,398 1,424
Loss on sales of property......................................... -- 6
Deferred income taxes, net........................................ -- 983
Changes in assets and liabilities that provided (used) cash:
Accounts receivable............................................. 11,256 1,310
Inventories..................................................... 4,177 21,517
Prepaid expenses................................................ (268) (213)
Other assets.................................................... (212) 2
Receivable from ERLY............................................ (256) (158)
Accounts payable and accrued expenses........................... (9,108) (11,784)
Income taxes payable to ERLY.................................... (100) (156)
------- --------
Net cash provided by operating activities............................ 7,263 14,941
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment additions.............................. (1,422) (1,625)
Proceeds from sales of assets........................................ -- 1
------- --------
Net cash used in investing activities................................ (1,422) (1,624)
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in notes payable............................................ (3,437) (11,362)
Repayment of long-term debt.......................................... (1,500) (1,400)
Other, net........................................................... (26) 60
------- --------
Net cash used in financing activities................................ (4,963) (12,702)
------- --------
NET INCREASE IN CASH................................................... 878 615
CASH:
Beginning of the period.............................................. 1,864 1,721
------- --------
End of the period.................................................... $ 2,742 $ 2,336
======= ========
</TABLE>
See notes to consolidated financial statements
F-20
<PAGE> 109
AMERICAN RICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
FOREIGN
ADDITIONAL CURRENCY TOTAL
PREFERRED COMMON PAID-IN RETAINED TRANSLATION STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS ADJUSTMENTS EQUITY
------------- ------------- ------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance April 1, 1995....... $ 3,878 $ 2,444 $25,286 $13,352 $ (748) $44,212
Net earnings................ -- -- -- 376 -- 376
------ ------ ------- ------- ----- -------
Balance June 30, 1995....... $ 3,878 $ 2,444 $25,286 $13,728 $ (748) $44,588
====== ====== ======= ======= ===== =======
</TABLE>
See notes to consolidated financial statements
F-21
<PAGE> 110
AMERICAN RICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements presented herein at June 30, 1995 and
for the three month periods ended June 30, 1995 and 1994 are unaudited; however,
all adjustments which are, in the opinion of management necessary for a fair
presentation of the financial position, results of operations and cash flows for
the periods covered have been made and are of a normal, recurring nature. The
results of the interim periods are not necessarily indicative of results for the
full year. The consolidated balance sheet at March 31, 1995 is derived from the
March 31, 1995 audited consolidated financial statements but does not include
all disclosures required by generally accepted accounting principles. Although
management believes the disclosures are adequate, certain information and
disclosures normally included in the notes to the financial statements has been
condensed or omitted as permitted by the rules and regulations of the Securities
and Exchange Commission. These financial statements should be read in
conjunction with the audited financial statements and notes thereto included in
American Rice, Inc.'s ("ARI") Annual Report on Form 10-K for the fiscal year
ended March 31, 1995.
2. NOTES PAYABLE AND LONG-TERM DEBT
ARI executed an amendment to its $47.5 million revolving credit loan,
effective June 30, 1995. The loan bears interest at the prime rate of interest
plus 0.5% and will mature on May 24, 1996. Funds available for borrowing under
this loan at any time may not exceed 85% of eligible accounts receivable (or 90%
of accounts receivable backed by acceptable letters of credit from customers)
and 70% of eligible inventory. Previously, the interest rate of the loan was
prime plus 2.0% and funds available were limited to 85% of eligible accounts
receivable and 60% of eligible inventory. The outstanding balance on this loan
at June 30, 1995 was $26.6 million. At July 2, 1995, the borrowing base under
the line of credit was $32.1 million. During the three months ended June 30,
1995, ARI's maximum borrowing under its $47.5 million line of credit was $32.4
million.
In fiscal 1997, approximately $17.8 million of ARI's term debt is due to be
repaid, of which $13.3 million is due September 27, 1996. ARI is currently
pursuing various options to refinance this term debt.
ARI is required by its lenders to maintain a minimum net book value,
working capital, and certain financial ratios. ARI was not in compliance with
all such financial ratio requirements as of June 30, 1995. ARI has requested and
received waivers from its lenders for ratios that were not in compliance.
3. STATEMENT OF CASH FLOWS
Borrowings under revolving notes in the three months ended June 30, 1995
and 1994 totaled $94.4 and $89.1 million, respectively, and repayments during
the same periods totaled $97.8 and $100.5 million, respectively. ARI made cash
payments for interest and financing fees of approximately $3.2 million and $2.3
million during the three months ended June 30, 1995 and 1994, respectively. ARI
paid $311 thousand and $300 thousand for federal and state income taxes during
the three months ended June 30, 1995 and 1994, respectively.
4. REVERSE STOCK SPLIT
At a special meeting on September 1, 1994, ARI's shareholders approved a
one-for-five reverse stock split for all issues of preferred and common stock.
Trading on the new basis was effective on September 8, 1994. All per share
information in the financial statements has been adjusted for this reverse stock
split.
F-22
<PAGE> 111
NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED IN CONNECTION WITH ANY
OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT
CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY OF THE MORTGAGE NOTES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO
THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 8
The Company........................... 14
Use of Proceeds....................... 15
Capitalization........................ 16
Pro Forma Consolidated Financial
Data................................ 17
Selected Consolidated Financial
Data................................ 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 21
Business.............................. 29
Management............................ 41
Executive Compensation................ 43
Security Ownership of Certain
Beneficial Owners and Management.... 46
Certain Relationships and Related
Transactions........................ 48
Description of Capital Stock.......... 49
Description of Mortgage Notes......... 51
Description of Certain Indebtedness... 78
Material Federal Income Tax
Consequences........................ 80
Underwriting.......................... 84
Legal Matters......................... 84
Experts............................... 84
Index to Financial Statements......... F-1
</TABLE>
$100,000,000
LOGO
AMERICAN RICE, INC.
13% MORTGAGE NOTES DUE 2002
WITH CONTINGENT INTEREST
PROSPECTUS
JEFFERIES & COMPANY, INC.
AUGUST 21, 1995
<PAGE> 112
CHART APPENDIX
Inside Front Cover
The illustration consists of three photographs of the Company's branded rice
products and the Company's corporate logo set on a background photograph of
rough and milled rice. The corporate logo is centered on the page. The
uppermost photograph shows various packages of the Company's Comet(R),
Adolphus(R), Blue Ribbon(R) and Wonder(R) products. The photograph in the lower
righthand corner shows various packages of the Company's Colusa Rose(R), Green
Peacock(R), and Pear Blossom(R) products. The photograph in the lower lefthand
corner shows packages of the Company's Chopstick(R) brand of parboiled rice.
Inside Back Cover
The illustration consist of four photographs of the Company's U.S. rice
processing facilities and the Company's corporate logo set on a background
photograph of rough and milled rice. The corporate logo is centered on the
page. Clockwise from the upper righthand corner of the page are photographs of
the Company's rice processing facilities in Stuttgart, Arkansas, Biggs,
California, Maxwell, California, and Freeport, Texas.
